There are two broad views on our newly resurgent global bubbles – the increase in asset prices in emerging markets, fuelled by capital inflows, with all the associated bells and whistles (including dollar depreciation). These run-ups in stock market values and real estate prices are either benign or the beginnings of a major new malignancy.
The benign view, implicit in Secretary Geithner’s position at the G20 meeting last weekend, is most clearly articulated by Frederic (Ric) Mishkin, former member of the Fed’s Board of Governors and author of ” The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems To Get Rich”, in the Financial Times this morning.
“The second category of bubble, what I call the ‘pure irrational exuberance bubble, is far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage”
In other words: keep monetary policy right where it is, and don’t worry about financial regulation. Continue reading “Global Bubbles: The Geithner-Brown Split”