While U.S. policymakers are still dealing with the effects of the last bubble, Harvard economist Ken Rogoff is concerned that bubbles will eventually occur again.
“I’m very worried about having bubbles in the future and another financial crisis,” he told Bloomberg.
And what would be the signs of trouble?
“The big issue is if you see tons of borrowing that’s fueling an asset bubble, as we saw with housing,” Rogoff said. “That’s when you worry. It’s not so much that prices go up and down.”
He agrees with Federal Reserve Chairman Ben Bernanke that improved regulation is needed to fight bubbles – “a structure where it’s not so easy to borrow,” Rogoff said.
“It’s absurd how little regulation we have on that, how inflationary our financial system has become.” And he doesn’t see Congress doing much on the regulation front.
But Rogoff is concerned with proposals in Congress to give itself more oversight over the Fed’s monetary policy. “For sure the Fed should have monetary independence,” he said.
“I think it would be really a signal event if Congress pulls back some of that. You can kiss goodbye to years of low inflation if that happens.”
New York University economist Nouriel Roubini says a new bubble already has formed in risky assets, fueled by the dollar’s weakness. “One day this bubble will burst, leading to the biggest coordinated asset bust ever,” he wrote in the Financial Times.
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