PARIS: 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 a search for good returns when interest rates are hovering near record lows, creating the bubble conditions for a new market crash.
The Bank of International Settlements (BIS) warned 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.
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 have slumped, showing investors do not see them as a risk despite their persistently weak economic growth, while equities have bounded 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.
Concern about asset bubbles is also spreading to property markets, with London real-estate now on average 20 per cent more expensive than before the onset of the financial crisis.
German Finance Minister Wolfgang Schaeuble warned the European Central Bank 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, while his French counterpart Michel Sapin warned that “in parts of the property market there are signs that bubbles are forming”.
Central banks have sought to calm concerns, arguing they need to keep rates low to stimulate tepid economic growth. AFP