U.S. Economic Steps May Be Leading To Bubble

Correction Nov. 13, 2009

This story inaccurately described the housing market in China by suggesting that people there don't use mortgages. Many Chinese do buy homes with borrowed money, though they're not borrowing on the scale that helped trigger the subprime crisis. China's central bank sets minimum down-payment levels, often 20 percent of a home's value.

The global economy is slowly recovering after the worst financial crisis in decades, but government efforts to stimulate growth, including the Fed's move to drive interest rates down to zero, may be creating another problem. Prices for assets — gold, stocks and real estate in Asia — are soaring, leading to warnings that a new bubble could be forming.

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ROBERT SIEGEL, Host:

We are losing jobs in the U.S., even as Asia's economy is taking off, which brings us to new questions about new bubbles, not the friendly kind that children blow. The World Bank this week warned about a bubble in China's stock market and there's also concern about a housing bubble in China.

David Kestenbaum of NPR's Planet Money team is here to talk with us. Hi, David.

DAVID KESTENBAUM: Hi, Robert.

SIEGEL: How worried should we be about more bubbles and give us a quick overview of what an economic bubble is?

KESTENBAUM: Unfortunately our working definition of what a bubble is is sort of, you hear a pop and you say, wow.

SIEGEL: That was a bubble.

KESTENBAUM: That was a bubble, yeah. I mean, it can be very hard to know when you're in one. If everyone could've spotted one, we probably wouldn't be in this mess in the first place. But, as you mentioned, the economy's sort of grim here. In China, things are growing. And one reason is that China forced its bank to lend out a lot of money. That money has made its way into the economy through salaries and now there are people sitting there with money. And unlike in more developed countries, there are limited number of places you can put it. So, a lot of it's gone to the stock market or people buy houses and so those are two places people worry you may see bubbles beginning.

SIEGEL: Now, the China housing bubble, is it a bubble like the housing bubble in the U.S. that could pop and pop catastrophically?

KESTENBAUM: Are we restarting another bubble? I spent a while asking that question on the phone today. And there's not a lot of great data in China. It does seem like in big cities you are seeing a rise in housing prices. Prices are actually rising there. But when you ask if it pops what happens, you have to look at how people are paying for their houses. Part of the problem over here with the subprime crisis and the mortgage crisis was that people had mortgages and when the prices dropped they couldn't pay their mortgages and then you get a whole chain reaction.

KESTENBAUM: Many Chinese do buy homes with borrowed money, though they're not borrowing on the scale that helped trigger the subprime crisis. China's central bank sets minimum down-payment levels, often 20 percent of a home's value.]

SIEGEL: Now, you mentioned what the Chinese have done with their banks, central banks all around the world have been lowering interest rates to try to get banks lending again, to try to get the economies going again, is that in fact creating bubbles?

KESTENBAUM: Arguably, this was one of the things that got us into trouble in the first place, right - one of the things that helped to create the housing bubble in the United States. And the argument for how that happens is this: If interest rates are really low, I have money, I'm not going to put it in a savings account because it's not going to pay me very much interest. I'm going to look for some better place to put it that's going to give me greater return. If I don't choose wisely, all that money can go to someplace like housing and you get a housing bubble.

SIEGEL: Right.

KESTENBAUM: The argument is that we'd lower interest rates, but, you know, the global economy is still, in general, wounded. So, the effect it's having is not to create bubbles so much as to just kind of restore a more normal market function.

SIEGEL: Okay. There's more money, though, going into economies and we would expect bubbles to possibly inflate some place where all that money is going. Where's the money going?

KESTENBAUM: I mean, some of it is going to the developing world, you know, like China and Latin America. In fact, interestingly, not everybody wants the money. Brazil recently put a tax in place on foreign investment. And their concern is that if people just sort of invest and then pull the money out, that's not very good for the economy. But they also worry about a bubble. So there is all this money looking for a home and not everybody wants it.

There's also asset - we see, you know, stock markets going up around the world, we see the price of gold, you see other commodities - and it's hard to know if those are bubbles or just people are feeling better about the economy. It's hard to know if these things are all little bubbles or not.

SIEGEL: Is there any method to predicting bubbles?

KESTENBAUM: That is a deep and long-running philosophical question in the economic community. At the beginning in this crisis, I was at a meeting of finance ministers from around the world and they all pretty much, when I talked to them, were of the opinion that, look, you can't predict bubbles, you know. They're only obvious after the fact and you don't want the government messing with those things.

However, that was really before things got bad. I think things have gotten so bad that you are now hearing people say maybe the government should be trying to figure out where there might be bubbles and doing something to slow them down so that we don't have a big crisis, even if does mean the economy runs a little more slowly.

SIEGEL: Thank you, David.

KESTENBAUM: You're welcome.

SIEGEL: David Kestenbaum of NPR's Planet Money team.

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