Germany warns US on market bubbles

By Ralph Atkins in Frankfurt / Financial Times


Published: November 20 2009 19:48
Last updated: November 20 2009 19:48

Germany’s new finance minister has echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar.

Wolfgang Schäuble’s comments highlight official concern in Europe that the risk of further financial market turbulence has been exacerbated by the exceptional steps taken by central banks and governments to combat the crisis.

Last weekend, Liu Mingkang, China’s banking regulator, criticised the US Federal Reserve for fuelling the “dollar carry-trade”, in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad.

EDITOR’S CHOICE
In depth: Dollar under pressure - Nov-20Editorial Comment: Deficit attention - Nov-20View from the Top: Robert Zoellick - Nov-20Long View: Fears of US double-dip recession - Nov-20Lex: Bernanke blowing bubbles - Nov-17China says Fed policy threatens global recovery - Nov-16Speaking at a banking conference in Frankfurt on Friday, Mr Schäuble said it would be “naive” to assume the next asset price bubble would take the same guise as the last.

He said: “More likely today is a scenario in which excess liquidity globally creates a new [sort of] asset market bubble.”

He added: “That low interest rate currencies such as the US dollar are increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.”

Mr Schäuble, a political veteran, took over the German finance ministry after Angela Merkel began her second term as chancellor last month.
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His comments reflect the concern of European policymakers that the continent will bear the brunt of a global adjustment process through a stronger euro.

Further signs of official frustration about policy steps being taken elsewhere came from Lorenzo Bini Smaghi, a European Central Bank executive.

He said in a speech in Paris on Friday that emerging Asian economies were continuing “strongly accommodative monetary policies” in spite of their faster economic recoveries.

Although Mr Bini Smaghi did not mention the euro or the eurozone, he warned that delays in implementing an “exit [strategy] by the countries that are ahead in the cyclical upturn creates distortions and encourages other countries to delay their exit, thus further adding to the imbalances and making the exit more difficult for everybody”.

Separately, Jean-Claude Trichet, ECB president, issued his strongest warning yet that banks must control pay and bonuses.

Striking a noticeably stiffer tone, Mr Trichet told the Frankfurt conference: “Profits earned should be used, as a priority, to build capital and reserves, rather than be paid out as dividends or excessive compensation.”

The ECB president quoted a warning by Johann Wolfgang von Goethe, Frankfurt’s most famous son, on the need for self-restraint: “If I wanted to lavishly let myself go, I could well destroy myself and my environment.”

Mr Trichet said: “Compensation and bonuses must remain contained. Otherwise, we would take risks that Goethe [has] already described.”