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Saturday, Nov 07, 2009
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Business Daily from THE HINDU group of publications Saturday, Nov 07, 2009 ePaper | Mobile/PDA Version | Audio | Blogs |
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Economy Money & Banking - Financial Markets Columns - Financial Scan Asset bubbles to exit recessions? Is creating asset bubbles the only ‘exit’ route from recessions? Can recoveries be engineered differently? S. Balakrishnan In its last several meetings, the Federal Open Market Committee (FOMC), the US interest rate and monetary policy setter, hasn’t had much thinking to do. Its decision was obvious — to keep interest rates near the zero level that has prevailed for quite some time now and to continue with liquidity support to the financial markets as necessary. Not that the FOMC is happy about its inactivity. On the one hand, are the hawks who believe such prolonged monetary softness risks inflation getting out of hand, although that fear is not about today but an indefinable time in future. About the only sign of rising prices is in the commodity markets — crude oil and gold. Gold’s jump in recent weeks is directly attributable to the fall of the dollar and a loss of faith in currencies in general as Governments try to print their way to economic recovery. It doesn’t figure in any cost-of-living index. Oil is part of inflation measurement and its strong price action amidst a weak US, Europe and Japan is mystifying. Still consumer price indices are tame and economies are functioning much below potential, emboldening the Fed to assure an easy monetary stance for a ‘prolonged period’. The Bank of England will keep buying gilts, although on a slightly lesser scale than expected. It is only the European Central Bank (ECB) which is hawkish in proclaiming its intention to reverse course at the earliest opportunity, but that may be some time in coming. Add China and India and the list of central banks on monetary overdrive covers just about every major world economy. The prescient US economist, Nouriel Roubini, now talks of carry trades, in which cheap currencies finance speculation in commodities and stock markets in emerging economies. Market players have the certainty of borrowing dollars for next to nothing — the ‘mother of all carry trades’ — thanks to an obliging Fed keeping rates near zero for an extended period of time. Where will it lead and how will it end? Roubini predicts an emerging markets’ asset bubble, which, in the manner of all asset bubbles, will finish in tears. But even he is not saying a crash is imminent. In fact, this asset price boom may have some distance to run. The big change obviously is that monetary and fiscal stimuluses don’t act as effectively or quickly on the productive sectors as on the financial sector and asset prices. The transmission effect on the former may be more through the latter. The implications are worrying. Is creating asset bubbles the only ‘exit’ — to use a recently much abused word in a different sense — route from recessions? Can recoveries be engineered differently? It’s the price we are paying for allowing the financial sector to overwhelm the real economy. More Stories on : Economy | Financial Markets | Financial Scan
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