William Pesek: Bankers caught in Greenspan web

Call it Alan Greenspan's global legacy. As well as creating an ad-hoc policy style that influenced peers the world over, Greenspan changed the image of the villainous, curmudgeonly central banker during his 18-plus years running the Federal Reserve. He made the job seem glamorous.

Central bankers, when they are in the spotlight at all, used to be despised, a product of their tendency to take away the punch bowl just as the party gets going.

Greenspan's predecessor, Paul Volcker, received death threats in the early 1980s as he raised interest rates to contain United States inflation.

By the mid-1990s, Greenspan was a bona fide celebrity; his picture routinely turned up in People magazine with photos of Tom Cruise and Cameron Diaz. In 1998, he was a runner-up for Time magazine's person of the year, with the late Princess Diana. Late Show host David Letterman often worked Greenspan into his comedy shtick. The Fed chairman ate up the attention.

Greenspan was in the limelight for the wrong reason: he took part in the US's boom - some might even say he acted as cheerleader - as opposed to regulating it. His easy-money policies brought the party to new heights, fuelling asset bubbles in the US and, more recently, China. Lots of cheap, US-provided money flowed into already overheated Chinese assets.

Now it seems like it's Asia's turn to leave the punch bowl out for too long.

"Central bankers today look suspiciously like Santa Claus," said Andy Xie, chief Asia economist at Morgan Stanley in Hong Kong.

"They provide more booze and nibbles when the party starts to run low. They nurse bubbles like doting grandparents. Consequently, financial markets have come to expect central bankers to bail them out whenever they run into trouble."

The risk is what markets call "moral hazard", or the notion of a safety net to protect investors from losses - one that might encourage even riskier behaviour. And that's where many of Asia's central banks may find themselves.

There are exceptions. Central banks in South Korea and Singapore seem to be doing what monetary policy makers are supposed to. Japan's may be going too far by warning it will raise interest rates again soon, even though Asia's biggest economy is still experiencing some deflation.

More broadly, though, central banks are acting timidly amid accelerating consumer prices. Too many are "taking a leaf out of the Fed's book", Xie said.

"Central bankers nowadays too often sound like bullish Wall Street analysts who can explain away all investors' worries."

Xie is especially concerned about India and China, even after last week's Chinese rate increase. The risk is that the kind of "price-wage spiral" that central bankers try to avoid is already afoot. Inflation-adjusted borrowing costs globally may not be high enough to control rising consumer prices.

Admittedly, these are disorienting times for central bankers. Over the past dozen years or so, a series of deflationary forces - the internet, China, outsourcing, and rapid advances in computers - contained inflation.

Even when central banks pumped lots of liquidity into the global system, it inflated asset values and boosted growth without the typical jump in consumer prices.

All this has left central bankers reluctant to slam on the brakes as they might have 15 years ago. One reason is that asset markets are now much bigger relative to gross domestic product.

Xie estimates that the global ratio of property and stock market value to GDP has risen by 50 per cent over the past decade.

Central bankers may be concerned that rate increases will quickly turn asset inflation into deflation.

Yet the forces suppressing inflation in recent years may be waning. Globalisation reduced wage pressures in industrialised countries. Now, not only are developed-nation wages rising, but so are those in developing Asia.

China, for example, is waking up to a side-effect of its economic boom: pollution. After years of keeping the global cost of manufacturing artificially low, there's political pressure within China to make production more expensive to account for and limit damage to the environment.

That, at a time of record oil prices, may push up inflation rates around the world.

Of course, it's easier for central banks in the US or Europe to attack inflation. Neither Fed Chairman Ben Bernanke, who replaced Greenspan in February, nor European Central Bank President Jean-Claude Trichet is juggling poverty the way their counterparts in Beijing, Jakarta, Manila or New Delhi are.

Debt is an issue, too - government and otherwise.

"Household debt has risen sharply in many countries, and so the impact of higher interest rates on the debt-servicing costs of households is more burdensome than in the past," said Mingchun Sun, Hong Kong-based economist at Lehman Brothers Asia.

Even so, inflation won't help Asians living on US$2 a day or less. Neither will taking the pressure off governments to create good jobs and to stop relying on low borrowing costs. If developing nations are to become mature economies that investors take seriously, central banks must do their jobs.

Otherwise, the price will be higher debt yields, lower equity prices, reduced foreign investment and less money for education, roads, bridges, power systems and health care. It may just be that Asia's outlook requires a little less Santa and little more Scrooge on the part of central bankers.

* William Pesek is a Bloomberg News columnist.