Thursday, July 12, 2007

The definition of asset bubbles

this article from Raja Petra's Malaysia-today.

the definition of asset bubble:
Too much money in the system (M3). Interest rate is relatively low, credit is easy, for the purpose of continuing economic growth. Unemployment is low, hence economic confidence is high.
People have jobs and had savings in the bank for the past few years, enough for a property purchase deposit.
So everyone start thinking of buying properties for housing and investment.
What else is safer than house?
Its still roof over your head and your stake of claim on earth.
Problem is when supply of new housing doesnt keep up with demand. Then price starts to rise. The momentum will feed on itself. Year after year of value increase would become life on itself. Until suddenly, demand disappears.
Then we call it 'the bubble has burst'.
But as long as population growth is there, increase income is sustainable, there is always a need for new housing, then commercial properties.
12/07: Ex-RBA man warns of second Asian financial crisis
[print] Category: General
Posted by: Raja Petra
The Sydney Morning Herald

AN ASSET bubble in Asia could cause another financial crisis like the one a decade ago, a former deputy governor of the Reserve Bank of Australia said yesterday.

Stephen Grenville, a member of the central bank's board during the 1997 Asian financial crisis, said Asia's financial sector was still fragile and he predicted Asian nations would be reluctant to seek help from the International Monetary Fund if another crisis emerged.

Dr Grenville said a shortage of foreign currency reserves in Asian economies was still a problem. "There's the possibility when exchange rates come under par, they [investors] will change their behaviour in a way that's most inconvenient," he told the Lowy Institute think tank in Sydney.

Volatile capital flows, fragile financial markets and "less anchored" exchange rates added to the risk of another Asian financial meltdown, he warned.

"They [the Asian economies] are going to have current account deficits if they get capital flowing again," he said.

"They'll have to have higher exchange rates. When you have more investment, you have the possibility of an asset bubble."

However, Dr Grenville said another financial crisis in the near-term was unlikely. "There seems to be no chance of another crisis like that any time soon," he said.

In July 1997, the "tiger" economies of Indonesia, South Korea and Thailand were plunged into economic turmoil after capital investments were abruptly withdrawn as investors lost faith in corporate governance.

Malaysia, the Philippines, Hong Kong and Laos were also affected.

The battered Asian economies had previously kept interest rates high to attract foreign investors seeking high returns.

Dr Grenville said the International Monetary Fund had not made much progress with its governance in the decade since the Asian financial crisis and Asian economies would probably delay asking for help if another emergency arose.

"You do need an international lender of last resort but the countries have said 'never again'," he said, before advocating the creation of a regional Asian monetary fund.

After the 1997 financial crisis, Asian economies turned current account deficits into current account surpluses. As foreign debt levels fell, so did economic growth rates.

To grow again, Dr Grenville said Asian economies would have to run current account deficits as a price for attracting foreign investment.

He said the Indonesian and Thai economies should be growing much faster than they were. "If China can grow by more than 10 per cent, then the countries of South-East Asia should be growing by more than 5 per cent," Dr Grenville said.

He said Indonesia's gross domestic product would be a third higher than what it is now if the 1997 crisis had not curbed its previously higher economic growth rate of about 7 per cent.

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