Back
19 Aug 2013
Does new bubble risk undermining US economic recovery?
FXstreet.com (New York) - Having now been six years since the start of the most recent US financial crisis, President Barack Obama, is now taking preventative steps to make sure his economic recovery doesn’t instigate the next one.
Measuring true progress
Earlier this month, Obama spoke four times in five days of the need to avoid what he tabbed “artificial bubbles,” a strange notion, given that the economy is showing signs of growth – albeit a tepid 1.7% rate. Indeed, while at first glance this may seem satisfactory, however the fact remains that employment and factory usage remain below pre-recession highs.
“We have to turn the page on the bubble-and-bust mentality that created this mess,” he said in his August 10 weekly radio address. Obama’s cautionary tone calls attention to the acute risks of the financial crisis, which were spawned by a speculator-driven rises in asset values, of which he argues may be forgotten, widening the income gap and undermining a broad-based recovery.
“Clearly, this is a growing concern both in the administration and at the Fed,” notes Adam Posen, a former member of the Bank of England’s monetary policy committee. While economists are more concerned with inadequate growth, there’s reason for vigilance and attention. Thanks to historically low borrowing costs, US companies have issued nearly $241 billion in junk bonds this year alone, more than twice the amount during the same period in 2007 – investors’ use of borrowed money to buy stocks is up about one-third in the past year to a near record, and housing prices are surging uncontrollably in areas such as Las Vegas and Phoenix.
Concerning yes, impending doom no
In terms of equities, US stocks also are near record highs, with the Standard & Poor’s 500 Index rising about 16% alone so far this year. “It’s a legitimate concern from an economic perspective,” says Roberto Perli, a partner in Cornerstone Macro, a Washington economic-research firm, and a former Fed official. “However I don’t think it’s motivated by consideration of imminent risk.”
Measuring true progress
Earlier this month, Obama spoke four times in five days of the need to avoid what he tabbed “artificial bubbles,” a strange notion, given that the economy is showing signs of growth – albeit a tepid 1.7% rate. Indeed, while at first glance this may seem satisfactory, however the fact remains that employment and factory usage remain below pre-recession highs.
“We have to turn the page on the bubble-and-bust mentality that created this mess,” he said in his August 10 weekly radio address. Obama’s cautionary tone calls attention to the acute risks of the financial crisis, which were spawned by a speculator-driven rises in asset values, of which he argues may be forgotten, widening the income gap and undermining a broad-based recovery.
“Clearly, this is a growing concern both in the administration and at the Fed,” notes Adam Posen, a former member of the Bank of England’s monetary policy committee. While economists are more concerned with inadequate growth, there’s reason for vigilance and attention. Thanks to historically low borrowing costs, US companies have issued nearly $241 billion in junk bonds this year alone, more than twice the amount during the same period in 2007 – investors’ use of borrowed money to buy stocks is up about one-third in the past year to a near record, and housing prices are surging uncontrollably in areas such as Las Vegas and Phoenix.
Concerning yes, impending doom no
In terms of equities, US stocks also are near record highs, with the Standard & Poor’s 500 Index rising about 16% alone so far this year. “It’s a legitimate concern from an economic perspective,” says Roberto Perli, a partner in Cornerstone Macro, a Washington economic-research firm, and a former Fed official. “However I don’t think it’s motivated by consideration of imminent risk.”