Thursday, May 30, 2013

Roubini On Quantitative Easing & Asset Bubbles

It is hard to predict bubbles and their bursts, but I would say that we are having tension in the US and the global economy. On one side, growth is weak in advanced economies and unemployment rate is high and that justifies more quantitative easing. Existing quantitative easing and zero policy rate very slowly will try and support recovery but on the other side, a lot of this liquidity is not creating credit for the real economy and is going into asset prices, greater risk taking and greater leveraging into the financial system.
There is already frothiness in the asset market in the US and over time low rates are going to cause credit, asset and equity bubbles which may become dangerous. Not today, but certainly three to four years of zero policy rates will lead to that. There could be a repeat of the cycle which we had seen between 2004 and 2008 when real economy weakness justified keeping rates low for longer and exiting from those low rates slower, but that attempt to stabilize the real economy created financial instability and frothiness that led to a bubble which eventually busted. - in livemint
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