In a world still struggling to shake off the worst financial crisis for a generation, many economists are worrying that new asset bubbles are already threatening to derail the tepid global recovery.
Concern has been rising that investors are paying too much for securities in search of good returns when interest rates are hovering near record lows, creating the bubble conditions for a new market crash.
The Bank for International Settlements (BIS) said at the end of last month that financial markets were running ahead of economic reality, and called for governments to stop new debt-driven overspending.
The BIS, the so-called central bank of central banks, called for policies that “lean more deliberately and persistently against financial booms and ease less aggressively and persistently during busts.”
BIS general manager Jaime Caruana said as he presented the report: “During the boom, resources were misallocated on a huge scale, and it will take time to move them to new and more productive uses.”
Bond rates for European countries hit hard by the eurozone debt crisis, such as Greece, have slumped, demonstrating that investors do not see them as a risk despite their persistently weak economic growth, while equities have jumped to unprecedented levels.
Critics argue that is the fault of central banks, which have kept their rates at record lows and pumped their economies full of liquidity first to stave off recession and then to boost growth.
US stock markets have posted successive new record highs over recent weeks, with the Dow Jones for the first time breaking the psychologically key 17,000 mark.
Weighed down by the political crisis in nearby Ukraine, European stocks have been somewhat restrained in the last few days — although Germany’s main index, Frankfurt’s DAX 30, hit a record high this month. Concern about asset bubbles is also spreading to property markets, with London real-estate now on average 20 percent more expensive than before the onset of the financial crisis.
German Finance Minister Wolfgang Schaeuble told the European Central Bank (ECB) just days ago that its loose monetary policy risked inflating markets to dangerous levels with cheap money.
“We can’t just leave the avoidance of bubbles to government supervision,” he said.
French Minister of Finance Michel Sapin said that “in parts of the property market there are signs that bubbles are forming.”
Earlier this month the head of the IMF, Christine Lagarde, took a similar line, warning that financial markets were “too upbeat.”
Central banks have sought to calm concerns, arguing they need to keep rates low to stimulate tepid economic growth or, in the case of the ECB, avert the risk of deflation.
ECB Pcesident Mario Draghi said earlier this month that while markets were looking “frothy,” they do not present the systematic risks they did before the global financial crisis.
“We don’t have the general conditions that accompany the creation of systemic bubbles,” he told a European Parliament committee.
His comments came after the ECB unveiled unprecedented new measures last month designed to boost lending and prevent the eurozone from slipping into deflation.
US Federal Reserve Chair Janet Yellen has also noted concern about asset prices, saying she does not think stock markets are in bubble territory, despite the recent surge in all of Wall Street’s major indices.
Valuations were “not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic,” she said in a report to the US Congress.
However, analysts warn it is central banks themselves which are fueling asset prices by keeping their accommodative monetary policy in place for too long.
Rate increases by major central banks expected in the second quarter of next year may prove “too little too late” to stop markets from forming bubbles, said Gabriel Sterne, head of global macro investor relations at Oxford Economics.
“The problem is not the abundance of liquidity but low interest rates,” said Anton Brender, chief economist at Candriam Investors Group.
“These rates are a signal that central banks themselves are telling investors not to place their money with them, and instead to take risks,” he said.
The chief economist of insurer Euler Hermes, Ludovic Subran, said that the US is at risk because of its “financialized” public systems, and so “the challenge for Janet Yellen is to deflate the bubble without it exploding.”
In Europe, the risks are seen as far more localized than in previous crises. Brender said that rising property prices are not being accompanied by an explosion in credit as in the past, and that “there are clearly no bubbles” in Paris stocks, which are up less than 4 percent so far this year.
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