Former Chief Economist of the BIS: "I see speculative bubbles like in 2007

[NobleSavage]

"William R. White, the former chief economist of the Bank for International Settlements, warns of grave adverse effects of the ultra loose monetary policy.

William White is worried. The former chief economist of the Bank for International Settlements is highly sceptical of the ultra loose monetary policy that most central banks are still pursuing. «It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin», he warns."

http://www.fuw.ch/article/i-see-speculative-bubbles-like-in-2007/

What do you think? Will our loose monetary policies get us into trouble?

 

[Jason Harvestdancer]

My response is "Well, DUH!"

The economy is still in lousy shape, and I still see bubbles. I'm just impressed a professional also saw it.

 

[laughing dog]

Since the Fed has announced that QE3 is ending in October via a gradual reduction in the injection of bank reserves, and since most of the industrialized world is worried about deflation, not inflation, I think William White is swimming against the tide with his prediction.

 

[travc]

Since the Fed has announced that QE3 is ending in October via a gradual reduction in the injection of bank reserves, and since most of the industrialized world is worried about deflation, not inflation, I think William White is swimming against the tide with his prediction.

Unless I'm misunderstanding, White isn't warning of inflation; he's warning about speculative bubbles, specifically in the FIRE sector.
I don't really disagree with him about that either. The finance sector is way way too big, with absurd amounts of money frantically looking for higher rates of return.

IMO, this was always the problem with the monetary easing approach. It just addresses a symptom caused by the lack of demand while further feeding the financial sector beast. Still, since more significant fiscal stimulus was not an option, monetary easing was the only tool available and better than nothing. Yeah, it might well come back to bit us in the ass, but alternative was already happening and far worse.

 

[boneyard bill]

"William R. White, the former chief economist of the Bank for International Settlements, warns of grave adverse effects of the ultra loose monetary policy.

William White is worried. The former chief economist of the Bank for International Settlements is highly sceptical of the ultra loose monetary policy that most central banks are still pursuing. «It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin», he warns."

http://www.fuw.ch/article/i-see-speculative-bubbles-like-in-2007/

What do you think? Will our loose monetary policies get us into trouble?

You can't get much more mainstream than this. Of course, lots of people have been saying this for a long time and lot of them have been mainstream economists. The Fed's policies are radical and experimental. They are not mainstream.

But note, that he does endorse the original bail-out of the banks, but he notes that absolutely nothing has been done to address the fundamental problems of the bank's insolvency. There have been no defaults, no bankruptcies, no mergers. No effort has been made to re-structure the banking system. It's just a bunch of insolvent banks that have been living off the largesse of the Federal Reserve ever since 2008. Obama, meanwhile, seems willing to just run out the clock and hope it doesn't come unraveled until after his term of office. Problem is, 535 members of Congress seem to be following the same strategy.

 

[boneyard bill]

Unless I'm misunderstanding, White isn't warning of inflation; he's warning about speculative bubbles, specifically in the FIRE sector.
I don't really disagree with him about that either. The finance sector is way way too big, with absurd amounts of money frantically looking for higher rates of return.

IMO, this was always the problem with the monetary easing approach. It just addresses a symptom caused by the lack of demand while further feeding the financial sector beast. Still, since more significant fiscal stimulus was not an option, monetary easing was the only tool available and better than nothing. Yeah, it might well come back to bit us in the ass, but alternative was already happening and far worse.

A speculative bubble IS inflation. Just because asset prices are rising instead of consumer prices doesn't mean that it isn't inflation.

QE is probably the worst thing we could have done. Even one accepts the need for a bailout (which I don't), we still needed to address the fundamentals as Dr. White pointed out. QE has delayed the problem and made it worse. The banks are still insolvent after all that money thrown their way. The dollar is weaker and inflation has become global. Now the BRICS are rebelling at our policies and may just decide to bring the dollar down altogether.

Of course, when interest rates are kept ridiculously low, you're going to have money looking for yield, but all that does is create a stock market bubble. When interest rates rise, asset prices have to fall and "pop" there goes your bubble. The we get to start all over again but with an even worse recession than the last one.

Of course we've got bubbles. The Fed has specifically stated that creating bubbles in the bond market and real estate is their objective. The stock market bubble is icing on the cake.

- - - Updated - - -

Since the Fed has announced that QE3 is ending in October via a gradual reduction in the injection of bank reserves, and since most of the industrialized world is worried about deflation, not inflation, I think William White is swimming against the tide with his prediction.

If QE ends and interest rise, asset prices will fall. So that pops the bubble. Most of the industrialized world is mad as hell at the US for the global inflation that we are creating. They are not threatened by deflation at all. I don't know where you get that idea. You must be watching MSM. They ALWAYS get wrong. Every time. On every subject.

 

[laughing dog]

If QE ends and interest rise, asset prices will fall. So that pops the bubble. Most of the industrialized world is mad as hell at the US for the global inflation that we are creating. They are not threatened by deflation at all. I don't know where you get that idea. You must be watching MSM. They ALWAYS get wrong. Every time. On every subject.

Unlike many of the chicken littles, I am tethered to reality. From http://www.ft.com/cms/s/0/492d3096-ba82-11e3-b391-00144feabdc0.html#axzz2ynXHBt9J

Despite increasing warnings that the eurozone risks falling into deflation ...

And

The European Central Bank opened the door on Thursday to turning on its money-printing presses to boost the euro zone economy and keep inflation from staying too low. It kept interest rates steady at 0.25 percent at its regular meeting, but afterwards ECB President Mario Draghi said he and his colleagues were committed to doing anything they could to stop low inflation from dragging on too long.

(source: http://www.reuters.com/article/2014/04/03/us-ecb-rates-idUSBREA312CA20140403).

 

[travc]

A speculative bubble IS inflation. Just because asset prices are rising instead of consumer prices doesn't mean that it isn't inflation.

Not quite.
First off, by "inflation" most people mean widespread price increases. Overvaluing some asset prices in a single (or a few) sectors isn't that.
Secondly, while all bubbles involve price increases, not all price increases are due to bubbles.

As for your rant against QE... We've heard it before and I'm sure will hear it again. You state lots of things as facts which just aren't.

 

[SimpleDon]

Unless I'm misunderstanding, White isn't warning of inflation; he's warning about speculative bubbles, specifically in the FIRE sector.
I don't really disagree with him about that either. The finance sector is way way too big, with absurd amounts of money frantically looking for higher rates of return.

IMO, this was always the problem with the monetary easing approach. It just addresses a symptom caused by the lack of demand while further feeding the financial sector beast. Still, since more significant fiscal stimulus was not an option, monetary easing was the only tool available and better than nothing. Yeah, it might well come back to bit us in the ass, but alternative was already happening and far worse.

Monetary policy is tapped out, it is at the zero bound. Lowering interest rates will only put money into the economy if banks are willing to loan out money and that there are people who are trying to borrow money. With demand so low there are neither. The QEs are dealing only with a small, almost constant amount of money that isn't going into the broader real economy, but is going into the paper economy of stocks and bonds. As the bonds that the Fed has bought mature the Treasury has to issue new bonds to redeem the maturing bonds. This soaks up the money that the QEs produced.

The alternative to monetary policy is fiscal policy. What we need to do is to reverse the decrease in demand that the Reaganomic policies produced by lowering the labor share of the economy. In otherwords, we have to increase wages and to decrease profits. This is what even the IMF is recommending. The best way to do this is to increase the minimum wage and to increase deficit spending, preferably on infrastructure projects, highways, bridges, airports, etc.

 

[SimpleDon]

The FIRE sector is trying to get it's hands on the massive amount of capital that has been built up over the last thirty years by supply side economic policies intended to increase capital.

Wall Street creates a massive amount of money the same way that banks do, by making loans to the people who buy Wall Street's paper so-called investments. The purpose of the loan is to increase the bang for the buck of the paper investment. But they design it so that the investor doesn't even realize that he is borrowing money and so that the loan is paid back in full when the so-called investment does or doesn't pay off. However, interest rates don't really effect this business. The term is too short and the money involved is created and destroyed in the short time frame.

This is why Wall Street loves its derivatives. Wall Street then is acting like a bookie, trying to balance the books on each bet so that they aren't taking any risk. They just make money on the commissions risk free.

 

[boneyard bill]

Not quite.
First off, by "inflation" most people mean widespread price increases. Overvaluing some asset prices in a single (or a few) sectors isn't that.
Secondly, while all bubbles involve price increases, not all price increases are due to bubbles.

As for your rant against QE... We've heard it before and I'm sure will hear it again. You state lots of things as facts which just aren't.

[/QUOTE]

Of course asset prices can be rising to due economic growth, but it is not a very likely explanation in the current circumstances because there isn't any growth. So to say that there are no price increases, no inflation, is very misleading when asset prices are, in fact, rising and the Fed makes it very clear that their policy is intended to produce exactly that. The Fed has said all along that their solution to the popping of the last bubble is to blow the bubble back up again. This is not an accusation that I am making against them. It is what they claim is there policy. Does it make any sense? Not to me. The result will be another bursting of another bubble because that's what bubbles do.