Board-Ansicht
Mix-Ansicht- Tabula rasa? - Jacques, 28.08.2003, 22:01
- heat of the night - Jacques, 28.08.2003, 22:12
- zu pessimistisch - halte Variante d. Morgan-Stanley Mannes f wahrscheinlicher - kingsolomon, 28.08.2003, 22:40
zu pessimistisch - halte Variante d. Morgan-Stanley Mannes f wahrscheinlicher
-->keine Sorge, ist kein zugekiffeter wallstreeter
Und - immerhin ne Perspektive für Trader.
Global: Bubble Trouble
Joachim Fels (London)
Key Points
The inflation and deflation of the bond bubble this spring and summer was not an isolated event, in my opinion. Rather, I see this as the latest instalment of a long sequel, with many more likely to follow. The story of financial markets in recent decades is best told as a succession of ballooning and bursting bubbles sweeping through multiple asset classes. The heroes and the villains in this story are the central banks, in my view. They have unleashed serial bubbles, time and again, by pumping excess liquidity into increasingly deregulated asset markets. And, over time, central bankers have become prisoners of their own (or their predecessor's) past actions. To address the serial bubble problem, central banks would need to both mop up the excess liquidity sloshing around in the financial system and redirect their monetary policy strategies. But, with the world economy still in a fragile state, at least partly due to the hangover from the greatest of all asset bubbles, neither seems particularly likely anytime soon, in my view.
From the 1987 Stock Market Crash...
It is difficult, if not impossible, to say when and where the story really started. My own recollection sets in with the October 1987 stock market crash. In response to a sharp fall in equity prices that was seen as a risk to the financial system and, via wealth effects, the real economy, the Fed, led by Alan Greenspan who had taken office as chairman of the FOMC only two months before the crash, flooded the system with liquidity. Stock markets recovered quickly, the world economy turned out to be much stronger in the following years, and, as one of the by-products of the worldwide liquidity surge, a property bubble emerged in the US (and, more so, in Japan, where the BoJ had injected massive amounts of liquidity in the late Eighties to support the US dollar).
...To the 1994 Bond Bear Market…
When the world economy fell into recession in the early 1990s and the property bubble burst, American local savings banks, which were heavily exposed to the housing market, got into trouble. The Fed's reaction: more liquidity and a real fed funds rate of around zero for an extended period of time. This resulted in a bond bubble in 1993, which then burst with a bang in 1994 when the Fed finally started to raise short rates.
...To the Asian and Russian Crisis…
In the mid-1990s, excess liquidity started to fuel a worldwide equity rally and also found its way into the Asian emerging markets, where it fed a massive waste of capital. When the Asian emerging market rally ended in tears in 1997, and the Russian crisis followed in 1998, all the major central banks reacted yet again by pumping even more liquidity into the system. Initially, this inflated another bond bubble, which popped viciously in 1999. Then, it boosted equity prices further and provided the fuel for the enormous tech stock bubble of 1999 and early 2000.
...To Today's Woes
The story of the last three years is well known by now: an equity market crash followed by a recession, overcapacity, over-indebtedness, and financial sector trouble. And the response of the central banks is well-known, too: more liquidity, which helped pump up the bond bubble earlier this year and supported rallies in housing prices, equities, corporate debt, commodity prices and emerging markets -- you name it.
Blame Excess LiquidityÂ
One important lesson from this bubble narrative is that once the genie (read: excess liquidity) is out of the bottle, it is not only difficult to put it back in, but it is almost inevitable to let more genies of out of more bottles. The reason is that once a bubble bursts, this can have nasty consequences for the financial system and the real economy. Almost immediately, central banks come under pressure to"do something about it," and that something is usually rate cuts and fresh liquidity, which starts the process all over again. Over time, this should encourage a mushrooming of excessive risk taking (as there is always the famous"Greenspan put") and of the financial sector in general. Moreover, as the experience of the last few years amply illustrates, the inflation and deflation of asset bubbles tends to destabilise real economies via a multitude of channels such as wealth effects, balance sheet effects, and credit excesses or crunches.
Central Banks Unwilling to Change Course
Needless to say, most central bankers are well aware of these problems, even though many probably aren't willing to accept my claim that their own actions are often responsible for the ballooning and bursting of asset bubbles. But the relationship between asset prices and monetary policy has been a popular topic among academics, central bankers, and financial market participants for many years. The standard response from central bankers on this issue, however, usually goes as follows. First, it is virtually impossible to diagnose a bubble with any certainty until it bursts. Second, even if a bubble could be diagnosed, it is not usually the task of central banks to target asset prices, but to target consumer price inflation or growth, or both. And, third, even if central banks reacted to asset bubbles by raising interest rates, the extent of the rate hikes needed to reverse asset prices in times of exuberance might be so large that it would destabilise the real economy (see for example, Alan Greenspan's remarks at the Jackson Hole symposium on 30 August 2002, almost exactly one year ago, available on the Fed's home page).
More Focus on Money and Credit Might HelpÂ
Clearly, there is no simple cure available that could extinguish the mushrooming of asset bubbles and the volatility that this imparts on the real economy. And don't get me wrong: overshooting and undershooting are inevitable phenomena in financial markets. However, if central banks were willing to accept the notion that, in many cases, their own actions are responsible for, or at least magnify, asset price booms and busts, a natural response would be to pay more attention to credit and/or to monetary aggregates that provide information on the presence of excess liquidity. An alternative route would be to include asset prices in the central bank's objective function directly, but such an approach is fraught with difficulties, I believe.
But That's Not Where Central Banks Are Headed
Alas, despite an acute awareness among many central bankers about the links between monetary policy and asset prices, I believe it is unlikely that central banks will adjust their monetary policy strategies in a way that would help to avoid asset bubbles and the related instabilities in the foreseeable future. If anything, the recent and prospective tweaking of policy strategies goes in the opposite direction. In the US, the Fed may move toward becoming a more explicit inflation targeter over time, as advocated, for example, by board member Ben Bernanke.
In the euro area, the recent tweaking of the ECB's two-pillar monetary policy strategy appears to have reduced the importance the Council attaches to monetary and credit developments. Also, the ECB failed to develop the monetary pillar into a financial stability pillar, which would have helped to focus the Council more on the actual and potential consequences of its actions on asset prices. And in the UK, the forthcoming change in the Bank of England's remit from targeting RPIX inflation (which includes a measure of house prices) to HICP inflation (which at least for some years to come doesn't include house prices), will likely serve to weaken the impact of house price developments on UK monetary policy (see J. Fels, M. Baker UK Economics: R.I.P. RPIX, 4 July 2003).
Bubble Sequel Should ContinueÂ
The upshot of all of this is that the central banks, as prisoners of their past actions, are likely to continue to provide excess liquidity in the foreseeable future. Thus, a sequence of asset price bubbles and bursts is likely to remain an important feature of financial markets and will continue to be a source of instability for the real economy, in my view. That's good news for all those who thrive on financial or real volatility. But it's bad news for those companies and households who need to make decisions for the long term: bubble trouble.
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