Global Boom In Asset Prices Leads To Worries About Market Bubbles
RENEE MONTAGNE, HOST:
Stock prices are breaking records in the U.S. In Canada and Britain, home prices are booming. In Europe, even the most indebted governments are seeing the price of their bonds climb. It's a global boom in asset prices. And while it's making some folks rich, it's making others worry about bubbles. To find out more, we turn to David Wessel of the Brookings Institution. He's also a contributor to the Wall Street Journal. Good morning.
DAVID WESSEL: Good morning, Renee.
MONTAGNE: So David, what is going on here? Why are stock and bond and housing prices around the world so buoyant at this moment?
WESSEL: Well, I think there are a number of reasons. One is there is a whiff of optimism about the near-term trajectory of the U.S. economy and Britain's economy and even Japan's. Secondly, there's a lot of savings in the world that's looking for a place to go. And for some reason, businesses are unusually reluctant to use it to build factories or buy equipment or buy computers. And so that money is going into financial markets. And finally, and very importantly, the Federal Reserve and other central banks around the world are still holding interest rates really, really low. And that's chasing people out of cash and out of low-interest bank deposits into financial markets, so the price of financial assets are going up.
MONTAGNE: Which does not seem that much of a problem. I mean, aren't rising stock markets and housing prices better than the opposite?
WESSEL: Well, they're certainly good for people who own stocks, who own bonds, who own houses - the wealthier households in our society and others. And it's good times for companies or governments or consumers who want to borrow money if they can get the credit - if they can get the banks to lend them. The worry comes from those people who see early signs that we're building some asset bubbles. The kinds that can burst and cause all sorts of problems for an economy, just as we saw when housing prices fell in the U.S. in the mid-2000s. We had a global financial crisis and a very deep recession and all that. So for instance, recently The Economist is a consortium of all the world's central banks - it's called the Bank for International Settlements in Basel, Switzerland - recently warned that we're on the verge of another financial boom, and they're warning that it could end in another financial bust.
MONTAGNE: And what should be done about that?
WESSEL: Well, that's where this gets interesting. The people at the Bank for International Settlements sent this loud warning that the Fed and its counterparts are moving too slowly and too late to raise interest rates. They basically want the Fed to move sooner to raise rates even if the job market remains lousy and even if inflation is low. And there are a few people at the Fed - a minority to be sure - who agree with it. But the new Fed chairwoman Janet Yellen clearly disagrees. And we're going to learn more about that debate inside the Fed later today when the Fed releases the minutes of its June policy meeting.
MONTAGNE: What's Janet Yellen's response to the warnings of imminent bubbles?
WESSEL: Well, that's interesting too. Janet Yellen and her counterparts around the world used almost identical language in speeches and press conferences last week to reject the notion that this is the time to raise interest rates. Janet Yellen says the U.S. economy basically still needs the adrenaline of low rates to get us out of what is still a disappointing recovery. She and her counterparts all use the same words. They say that the first line of defense against another bubble is to use these new regulatory tools that they have - forcing banks to hold more capital. Britain recently put some new conditions on mortgages to try and slow the housing prices there. But everyone involved acknowledges that the use of these regulatory tools - they're called macroprudential tools because you need a new name for everything, of course. It's a very much a real-time experiment to see if we can avoid the bubble and bust cycle that has been so devastating in the last couple of years. But it was interesting that when Janet Yellen was at the International Monetary Fund the other day giving a speech, she did say that higher interest rates may at times be needed to curb risk to financial stability. Those are her words. But certainly, she said, not right now.
MONTAGNE: David Wessel is director of The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Thanks very much.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.