Here's something you might be interested in.
New York University economist Nouriel Roubini, who predicted the current woes, says that borrowing cheap dollars has created a massive, global asset bubble that will burst in ignominy -- although he doesn't know when. It's a column in the Nov. 1 Financial Times of London. I have commented on this blog that big financial institutions are borrowing dollars at near-zero rates and speculating in global markets, creating bubbles in many economies, including the U.S., rather than lending the money. The process is called the "carry trade," and was once mainly a yen phenomenon. Now gamblers are doing it with dollars, thanks to extremely low rates and the Federal Reserve's policy of buying paper to keep long rates lower. Roubini takes it a step further: he says that speculators are shorting the dollar (betting it will go down), and as the dollar plunges, are effectively borrowing at NEGATIVE yearly rates of 10% to 20%. This dollar carry trade forces other countries to lower their rates artificially, too. Hence the global asset bubble keep expanding exponentially. "The longer and bigger the carry trade and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The [Federal Reserve] and other policymakers seem unaware of the monster bubble they are creating."
Institutions engaging in the dollar carry trade include U.S. banks, particularly ones that used to be called investment banks. They are borrowing at zero or sub-zero rates and gambling with the money knowing that if their bets don't pay off, the government will save them. Hence, they are not lending the money to needy individuals and companies. Today (Nov. 2), Nobel Prize-winning economist Joseph Stiglitz said the banks should have been nationalized to guarantee that they would lend the money given to the by government. That appears to be an extreme solution, but policymakers must realize that the banks are recapitalizing by gambling with very cheap money, and their refusal to make an adequate number of loans is hurting the economy deeply.
New York University economist Nouriel Roubini, who predicted the current woes, says that borrowing cheap dollars has created a massive, global asset bubble that will burst in ignominy -- although he doesn't know when. It's a column in the Nov. 1 Financial Times of London. I have commented on this blog that big financial institutions are borrowing dollars at near-zero rates and speculating in global markets, creating bubbles in many economies, including the U.S., rather than lending the money. The process is called the "carry trade," and was once mainly a yen phenomenon. Now gamblers are doing it with dollars, thanks to extremely low rates and the Federal Reserve's policy of buying paper to keep long rates lower. Roubini takes it a step further: he says that speculators are shorting the dollar (betting it will go down), and as the dollar plunges, are effectively borrowing at NEGATIVE yearly rates of 10% to 20%. This dollar carry trade forces other countries to lower their rates artificially, too. Hence the global asset bubble keep expanding exponentially. "The longer and bigger the carry trade and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The [Federal Reserve] and other policymakers seem unaware of the monster bubble they are creating."
Institutions engaging in the dollar carry trade include U.S. banks, particularly ones that used to be called investment banks. They are borrowing at zero or sub-zero rates and gambling with the money knowing that if their bets don't pay off, the government will save them. Hence, they are not lending the money to needy individuals and companies. Today (Nov. 2), Nobel Prize-winning economist Joseph Stiglitz said the banks should have been nationalized to guarantee that they would lend the money given to the by government. That appears to be an extreme solution, but policymakers must realize that the banks are recapitalizing by gambling with very cheap money, and their refusal to make an adequate number of loans is hurting the economy deeply.