Bernanke on asset bubbles
The relaxed financing conditions in the global markets have been to India’s advantage but risks remain
Critics call it the Bernanke asset bubble. The continuing quantitative easing by central banks in the US, Europe and Japan has sent global asset pricing soaring. The synchronized rise in major equity markets despite different fundamentals—or what the International Monetary Fund has described as a three-speed recovery—suggests that prices are being driven by easy liquidity.
This is why the comments made by US Federal Reserve chairman Ben Bernanke over the weekend deserve attention. In a speech he gave in Chicago, Bernanke said there were fresh signs of excessive risk-taking in the financial sector as investors seek higher yields. He added that such activity “may affect asset prices and their relationships with fundamentals". It is a central banker’s way of saying there is a growing risk of asset bubbles.
Central bankers have for long debated whether they can identify asset bubbles and prick them before they damage the real economy of output and jobs. As one of the world’s foremost monetary economists, Bernanke had written a paper with Mark Gertler titled Should Central Banks Respond to Movements in Asset Prices? that was published in 2001. They argued that “aggressive inflation targeting substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses, as well as in scenarios in which technology shocks drive stock prices". Bernanke and Gertler did not think that central banks should target asset prices.
Bernanke said in his weekend speech that believing that asset bubbles can be identified is hubristic. But the very fact that the most important central banker in the world has shown some worries about how excessive risk-taking is delinking asset prices from fundamentals is significant.
The relaxed financing conditions in the global markets have been to India’s advantage right now because it is finding it quite easy to fund a record current account deficit. But there are risks that come with it. The quality of global capital coming in is deteriorating, so that India could be in trouble in case there is a sudden stop in capital inflows, either because of an exit from monetary easing in the developed countries or if there is a flight to quality during a spike in risk-aversion.
Should India be worried about the asset bubble? Tell us at views@livemint.com
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