Tags: joseph | Stiglitz | Bubble | Risk | Emerging | Market | Fed

Stiglitz: Fed Easing Will Fail in US, Inflate Emerging-Market Bubbles

Thursday, 11 Nov 2010 11:11 AM

The U.S. Federal Reserve’s plan to expand stimulus will fuel potential asset bubbles in emerging countries with strong growth that don’t have capital control measures, Nobel Prize laureate Joseph Stiglitz said.

“I do have worries on countries like India,” Stiglitz, a Columbia University economics professor, said today at a conference in Hong Kong. “The strong economies that don’t yet have capital control become the focal point for all this money.”

Monetary easing to spur growth in developed economies has sparked inflows of cash to Asia, threatening to propel higher prices for stocks, real estate and consumer goods. Asian nations may need capital control steps to curb the risk of asset bubbles forming due to the Fed’s easing, World Bank Managing Director Sri Mulyani Indrawati said this month.

Stiglitz said he is “not so worried about China,” because policy makers there are already concerned about the risk of property-price bubbles and they could use policy tools to cool the market in the world’s fastest-growing major economy.

The Fed said Nov. 3 it will buy an additional $600 billion of Treasuries to boost growth in the world’s largest economy.

Fragmenting Market

While the latest round of easing is “not likely to strengthen the U.S. economy very much,” it would “cause problems all over the world,” Stiglitz said. Responses from other countries include “exchange-rate intervention, capital control and taxes and so forth that are fragmenting the global capital market,” he said.

Growth in the advanced countries will slow to 2.2 percent next year, while the economies of developing Asia, including China and India, will expand 8.4 percent, according to International Monetary Fund estimates in October. Stiglitz said he sees “surprisingly strong growth” in Asia and a “long period” of slow expansions in the U.S. and Japan.

“Real estate investment and green investment would be an important part of an answer of how Asia would be able to maintain growth even though the traditional markets remain relatively weak,” he said. China’s investment in infrastructure is boosting economic growth in the long run and its rebound from the global financial crisis is an “impressive success story,” Stiglitz said.

Liquidity Flowing

India’s central bank raised interest rates for a sixth time this year on Nov. 2 to cool inflation, and that shows the bank is “concerned about asset price bubbles developing and the prospect of quantitative-easing liquidity flowing into real estate,” Credit Suisse Group AG said.

In China, property prices rose at the slowest pace in 10 months in October after the government raised interest rates and expanded measures to limit the risk of asset bubbles, including suspending mortgages for third-home purchases.

China should introduce property taxes to sustain the income of local governments, instead of relying on land sales, Stiglitz said. The nation would also need to develop public housing to stabilize the home market, he said.

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The U.S. Federal Reserve s plan to expand stimulus will fuel potential asset bubbles in emerging countries with strong growth that don t have capital control measures, Nobel Prize laureate Joseph Stiglitz said. I do have worries on countries like India, Stiglitz, a...
Thursday, 11 Nov 2010 11:11 AM
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