Cheap Money May Lead To New Financial Bubble

There are fears that parts of Asia are developing financial bubbles because cheap money is flooding their markets. In countries where interest rates are low, people are borrowing money and then investing it in hot emerging markets. David Wessel of The Wall Street Journal tells Renee Montagne that the prospects of a "killing" seems to be enticing investors.

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RENEE MONTAGNE, host:

China and other parts of Asia seem to have pulled through the global economic crisis in pretty good shape, though now there are fears that some of the region's economies are developing financial bubbles, which is why we've called the Wall Street Journal's economics editor David Wessel - who's on the line with us right now.

Good morning.

Mr. DAVID WESSEL (Economic editor, Wall Street Journal): Good morning, Renee.

MONTAGNE: So David, where exactly are we seeing signs of financial bubble?

Mr. WESSEL: Well, there are symptoms of bubbles in emerging markets in places like Brazil and particularly in Asia. The World Bank is worrying that stock markets in Asia - although they didn't have a great day, today - are looking a little frothy. And particularly in real estate in China, Hong Kong, Singapore, and Japan, the IMF has warned that a flood of foreign capital into Hong Kong is pushing real estate prices up to levels that it says they're divorced from fundamental forces. In Singapore, for instance, home prices were up nearly 16 percent in the third quarter. That's the biggest one time one quarter gain in more than 28 years.

MONTAGNE: And so soon after this big economic crash, what's causing this?

Mr. WESSEL: Well, that's a good question. Part of it is driven by the amazing rebound of Asian economies, and they're doing better than Europe and the United States, and so you'd expect their markets to be stronger and they are. But the fear is that there's so much cheap money in the world that the Federal Reserve and the European Central Bank are keeping interest rates so low that people are borrowing here and taking the money and investing it in hot emerging markets.

When you keep rates very low, people tend to borrow. And when they borrow, they tend to buy assets. And so you have this flood of foreign money into Asian markets where interest rates are higher, currencies are rising, so you make some money on that, and the prospects of a killing seem to be just enticing a lot of investors.

MONTAGNE: Still, what are the - what makes it a bubble rather than something like a healthy market?

Mr. WESSEL: Well, you know, the problem is it's almost impossible to tell in advance. There are some signs, particularly in real estate in Asia where you see these people lining up to buy apartments or there was a big line to buy some kind of stall to sell fish balls in Hong Kong, you see that kind of exuberance of people who are buying something today hoping they can sell it in a few months or a few years at a killing. That's a sign of a bubble. And then there's all these economists that sit around and they say what should the price be and is it going up too much? But the difficulty is that it's hard to tell in advance, and that makes it very hard to treat this problem.

MONTAGNE: Although is there any way to treat it?

Mr. WESSEL: Well, yeah. I mean one thing that could happen is that the central banks in the U.S. and Europe could raise interest rates. That would make borrowing more expensive and people would have less money to put in those things. Now it's a pretty blunt instrument and it would have some unwelcome affects as well, like hurting the unemployment even more than it's hurt in the U.S. now. The other thing you can do - and some of this is going on - is make it harder for people to borrow.

So, for instance, in Hong Kong, they're requiring bigger down payments. If you want to buy an expensive apartment in Hong Kong you have to put more money down. That's a discouraged speculation. And then in some Asian countries, the answer would be to let the currencies rise so much that foreign investors are no longer sure that the currency is going keep rising and they'll be a little reluctant to put money in. But a lot of Asian countries are reluctant to do that because that would hurt their exports, particularly at a time when China won't play ball and let its currency rise.

MONTAGNE: Now, okay, so financial bubbles possibly in Asia, what affect might it have on those of us here in the U.S.?

Mr. WESSEL: Well, a bubble is a great thing while it lasts. It's kind of like a high. And the problem comes when there's a bursting and things suddenly fall. That shakes markets, people lose money, and it's why the Federal Reserve now is thinking: we used to think we shouldn't worry about bubbles unless they pop. But as a result of this massive recession we have caused by a housing bubble and a credit bubble, they're now beginning to think are the things they could do - perhaps with regulation and supervision or rhetoric - that would discourage bubbles and there's a big ferment inside the Federal Reserve about what have we learned from this crisis and should we do things here in the United States to avoid a repeat of this horrible experience?

MONTAGNE: Well, we just have a second - few seconds left, but what - is it likely that the U.S. would do anything?

Mr. WESSEL: I think that we don't know yet. It's just - you can see this intellectual activity at the Fed as they try to plan for something they're afraid will happen someday in the future.

MONTAGNE: David, thanks very much.

Mr. WESSEL: My pleasure.

MONTAGNE: David Wessel is economics editor of the Wall Street Journal.

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