from the abc - "fears of financial bubble"

  1. dub
    33,892 Posts.
    lightbulb Created with Sketch. 350
    ABC Online

    Fears of financial bubble

    [This is the print version of story]

    AM - Friday, 26 March , 2004 08:26:02
    Reporter: Stephen Long
    TONY EASTLEY: Is there a risk the world economy could be destabilised by a dangerous new bubble forming in global financial markets?

    Australia's Reserve Bank seems to think so.

    It fears that low interest rates in all the key financial centres are luring investors into high-risk, high-yield investments.

    And it's not alone, members of the US central bank are expressing similar concerns.

    Finance Correspondent Stephen Long reports.

    STEPHEN LONG: The last time irrational exuberance gripped the markets of the world, during the tech boom, it created a stockmarket bubble of historic proportions. And when it collapsed it inflicted extraordinary losses, destroying more than US$7 trillion of wealth, more than twice the financial cost to the US of World War Two.

    And critics hold US Federal Reserve Chairman Alan Greenspan largely responsible.

    Journalist Peter Hartcher, author of a forthcoming critical book on Alan Greenspan.

    PETER HARTCHER: In '96, it was clear that there was a major bubble developing in the US stock market, turns out to be the biggest in the financial history of the world.

    He knew he had to do the right thing by suppressing it, repressing it, managing it.

    And he started to with his speech, that famous line about irrational exuberance, but the political reaction was too hot and he just backed off, and decided not only would he let the bubble run, but he aggravated that by then becoming a cheerleader for something he knew was going to burst in ugly circumstances.

    STEPHEN LONG: The Chief Economist at Northern Trust Co in the US, Paul Kasriel, also holds Dr Greenspan responsible, as chief cheerleader for the bubble, and the supplier of its fuel.

    PAUL KASRIEL: Alan Greenspan aided and abetted the stockmarket bubble. You don't have asset price bubbles unless you have cheap central bank credit.

    STEPHEN LONG: Now, authorities fear a dangerous new mania is gripping the world's capital markets.

    This is what the Reserve Bank says in a new report on financial stability.

    REPORT EXCERPT: The search for yield by private investors has pushed down risk spreads for corporate and emerging market borrowers alike, to levels last seen before the 1998 crisis.

    STEPHEN LONG: It's a concern shared by members of the US Federal Reserve's chief policy-making body, the Open Market Committee.

    The minutes of a recent meeting, released days ago, make these concerns clear.

    They express a fear that the lowest interest rates in 46 years have "contributed to valuations in financial markets that leave little room for downside risks".

    Translation: the markets are crazy.

    And critics are once again holding Alan Greenspan at least partly responsible, by holding rates so low, for so long.

    Philip Lowe is the Reserve Bank's head of economic analysis, and a world-renowned expert on market mania.

    This is what he told a seminar on Greenspan's record yesterday.

    PHILIP LOWE: The Fed's been very good at lowering interest rates quickly whenever it saw risks, downside risk to the macro economy. But it has not been willing to increase interest rates to reduce the probability of what it sees as very bad outcomes. It was not willing to increase interest rates to try and take some of the heat out of the stockmarket.

    STEPHEN LONG: Philip Lowe fears investors have come to rely on the Fed to save their skin.

    PHILIP LOWE: Investors come to believe that the Fed will bail them out. The Fed will be very happy to cut interest rates whenever any problems come along, and that that somehow reduces the… or increases peoples' appetite for risk-taking, and I think we're seeing some evidence of that currently in global capital markets.

    STEPHEN LONG: The trouble is, with interest rates so low and the US budget deficit so high, there won't be much scope to bail investors out this time.

    TONY EASTLEY: Finance Correspondent Stephen Long.

    © 2004 Australian Broadcasting Corporation

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.