Bubble, bubble, toil
and trouble…..bubbles away, bubbles for all!
I don't normally imbibe
in bubbles but when I do I like Bernanke's Fed bubbles - stay bubbly my friend.
Fed Concerned About Overheated Markets Amid Record
Bond-Buying
By Craig Torres -Jan 17, 2013
Federal
Reserve officials are voicing increased concern that record-low interest
rates are overheating markets for assets from farmland to junk bonds,
which could heighten risks when they reverse their unprecedented bond
purchases.
Investors
have been snapping up riskier assets since the Fed boosted its bond buying
to reduce long-term borrowing costs after cutting its overnight
rate target close to zero in December 2008. Enthusiasm for
speculative-grade bonds is at unprecedented levels, driving a Credit Suisse index that tracks the yield on more than 1,500
issues to a record-low 5.9 percent last week.
Now,
as central bankers boost their stimulus with additional bond purchases, policy
makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are
on the lookout for financial distortions that may reverse abruptly when the Fed
stops adding to its portfolio and eventually shrinks it.
“Prices
of assets such as bonds, agricultural land, and high-yield and leveraged loans
are at historically high levels,” George said in a speech last week. “We
must not ignore the possibility that the low-interest rate policy may be
creating incentives that lead to future financial imbalances.”
Bernanke
himself raised that concern this week, saying the central bank has to “pay very
close attention to the costs and the risks” of its policies during a
Jan. 14 discussion at the University of
Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor.
The
59-year-old Bernanke, who helped the U.S. economy
weather the worst financial crisis since the Great Depression, finishes his
second term in a year and his legacy will be defined partly by whether the Fed
withdraws stimulus without causing a collapse in markets that hurts economic
growth.
Policy
makers in recent weeks have voiced concern about market imbalances.
Fed
officials are “worried” and “working very hard on trying to make
sure that we are aware of where imbalances or distortions are showing up and we
don’t go too far down the road before we try to address those,”
Philadelphia Fed President Charles
Plosser said to reporters last week.
“Policy
makers are right to worry about the risks to financial stability from
large-scale asset purchases,” said Richard Barwell, a former Bank of England
economist now at Royal Bank of Scotland Group Plc. “There is a delicate balancing act
between providing much needed stimulus and encouraging another search for yield
with investors over-stretching themselves.”
Monitoring Conditions
Bernanke
said this week that the central bank since the financial crisis has “increased
enormously the amount of resources we put into monitoring financial
conditions.”
Bernanke
set up a new Office of Financial Stability Policy and Research headed by Nellie Liang,
an economist, to conduct financial system surveillance. Daniel
Tarullo, the Fed governor in charge of bank supervision and
regulation, established the Large Institution Supervision Coordinating
Committee (LISCC), a group of economists, quantitative modelers, lawyers, payment systems
specialists and reserve bank supervisors who look for risks among the
largest financial institutions. (and what were they doing before??)
Both
groups seek to identify the links between financial firms that could rapidly
spread instability, much like subprime assets during the financial crisis last
decade.
While
saying officials need to be “open-minded” about how monetary policy can lead to
excessive valuations, Bernanke said this week he considers supervisory tools “the
first line of defense” against asset-price bubbles. (yep…it worked in the past!)
Yet
bank regulators don’t always act quickly enough to defuse challenges to
financial stability, said Sheila Bair, former chairwoman of the Federal Deposit
Insurance Corp.
“Sometimes
we know a lot and the problem is we are not acting on what we know,” said Bair,
a senior adviser to The Pew Charitable Trusts. “I worry that there is still too
much” inertia among supervisors of financial firms.
No comments:
Post a Comment