World Bank, IMF warn of new bubbles

The World Bank and the International Monetary Fund are concerned that artificially low interest rates combined with huge sums of money sloshing around from "stimulus" programs and central bank coffers could lead to another round of asset bubbles, especially in Asia.

The Wall Street Journal has the story:

The World Bank warned Tuesday that the sudden reappearance of billions of dollars in investment capital in East Asia is "raising concerns about asset price bubbles" in equity markets across Asia and in real estate in China, Hong Kong, Singapore and Vietnam.

Also Tuesday, the International Monetary Fund cited "a risk" that surging Hong Kong asset prices are being driven by a flood of capital "divorced from fundamental forces of supply and demand."

Behind the trend are measures such as cutting interest rates and pumping money into the financial system, which have left parts of the world awash in cash and at risk of bubbles, or run-ups in asset prices beyond what economic fundamentals suggest are reasonable....

"This is the beginning of another big and excessive run-up in asset prices," said Simon Johnson, a former IMF chief economist.

Not everyone is convinced that's what is happening, however.

Rapidly rising prices aren't definitive proof. Stocks in Asian emerging markets currently trade at about two times book value, about average for the past 20 years, according to UBS. From 2004 to 2008, the price-to-book-value average was about three times.

"This doesn't feel like a bubble," said Hugh Simon, chief executive of Hamon Investment Group, which manages Asia-investment funds. "There's too much skepticism" among investors.

Well, let's say, for sake of argument, that there are bubbles forming, what then? Aye, there's the rub.

"Even those who say we should respond directly [and deflate bubbles] have no idea how to do it," said Laurence Meyer, a former Fed governor. "It is easy to take a philosophical position, but hard to become operational and practical about it."

I am reminded of a wise saying: "Every solution breeds fresh insolubles."

Stay tuned.

UPDATE: In his Washington Post column Monday, Robert J. Samuelson writes about the "thin line between promoting economic expansion and fostering bubbles."

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Joseph Slife is a contributing author and editor for SMI. Visit www.soundmindinvesting.com to learn more.