When Nouriel Roubini talks, the world listens. Roubini is, of course, the once-obscure New York University economist whose dire warnings about a financial crisis proved depressingly prophetic. Last week, Roubini was shouting. Writing in the Financial Times, he warned that the Federal Reserve and other government central banks are fueling a massive new asset "bubble" that -- while not in imminent danger of bursting -- will someday do so with calamitous consequences.

 

Here is Roubini's argument: The Fed is holding short-term interest rates near zero. Investors and speculators borrow dollars cheaply and use them to buy various assets -- stocks, bonds, gold, oil, minerals, foreign currencies. Prices rise. Huge profits can be made.

But this can't last, Roubini warns. The Fed will eventually raise interest rates. Or outside events (a confrontation with Iran, fear of a double-dip recession) will change market psychology. Then investors will rush to lock in profits, and the sell-off will trigger a crash. Stock, bond and commodity prices will plunge. Losses will mount, confidence will fall and the real economy will suffer.

...

Roubini's new bubble remains unproved. But this doesn't invalidate his warning. We've learned that there's a thin line between promoting economic expansion and fostering bubbles. With hindsight, lax Fed policies contributed to both the "tech" bubble of the late 1990s and the recent housing bubble, though how much is debated.

The most worrying signs of speculative excesses, says Tran, involve some Asian and Latin American developing countries. They've received sizable capital inflows (money from abroad). These have boosted local stock markets and reflect disaffection with the dollar. Their central banks -- imitating the Fed -- have also kept local interest rates low, fueling rapid credit growth. Some of their stock markets have exceeded previous highs. These countries face a dilemma. Raising rates may attract more "hot" foreign capital; keeping them low may encourage speculative borrowing in local currency.

But the dilemma arises from the Fed's low interest rates and the weak dollar. The conclusion: how deftly the Fed navigates from its present policy matters for the world as well as the United States. If it's too fast, it may kill the economic recovery; if it's too slow, it may spawn bubbles -- and kill the recovery.

WaPo via Fark

The end is nigh!!! I am waiting for the moon to bleed and the plague of locusts to start.

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