Cheap money over as asset bubble fears rise
By Cecile De Corbiere, AFP
December 13, 2013, 12:13 am TWN
PARIS -- Cash is so cheap these days that investors have been borrowing and ploughing them in assets from artwork to wine to bitcoins, betting that prices would rise.
And rise they did, some even setting records, but market watchers are now warning that asset bubbles may be forming and could well burst in 2014.
Central banks have been flooding the market with money at record low rates, deploying liquidity to fight crisis after crisis that have set in since 2008.
“We survived a major fire” that was put out “with a lot of liquidity,” said Bertrand Badre, financial director of the World Bank, during a roundtable at the French market regulator AMF.
“The Federal Reserve and others are continuing to water the market, but I think that at some point, we have to take stock of the situation,” he said.
AMF Chairman Gerard Rameix told AFP that “a risk that everyone agrees is a major one: is the abundance of liquidity,” pointing out that one of the factors that sparked the U.S. subprime crisis — the trigger of the 2008 global economic crisis — was excess liquidity.
In the heady days of early 2000, low interest rates fuelled lending. Even those with poor credit records were allowed to take out home loans, which those in the industry called subprime loans.
When property prices began to fall and interest rates rose, a large chunk of the population were caught in a double-squeeze, and many were forced to default on their debt, sparking the subprime crisis.
With billions of bad debts on their books, banks cut off lending, choking off the lifeline to companies that required financing to function.
To prevent a total meltdown of the global economy, central banks stepped in and released billions in liquidity.
But what began as stop gap action later became a move to prop up the world economy, which was sliding into recession.
Interest rates have plummeted to record lows. The European Central Bank in November slashed its key rate to an all-time low of 0.25 percent, matching the rate the U.S. Federal Reserve has had in place since the end of 2008.
It is now so cheap to borrow that investors are leveraging on loans and reinvesting them in assets in the hopes that prices rise.