NOW stay with me on this one – sometimes, insights into the financial markets come from unlikely sources. In my case, I was reminded of the dilemmas now facing policymakers while enjoying a yodel down memory lane, watching The Sound of Music. It was when I reached one particular verse that it came to me: “How do you solve a problem like Maria? How do you catch a cloud and pull it down?” Just substitute one word – you can almost imagine Julie Andrews asking “how do you solve a problem like a bubble?” It is so tough they should write a musical about it.
Back in the real world, former Fed president Alan Greenspan admitted last week he was wrong 30 per cent of the time. But he didn’t know whether keeping interest rates so low over the past decade was one of those times.
But before we blame Greenspan for the past bubble and bust, it is worth reiterating that there was a lot of blame to go around in this area. Take your pick from generous central bankers, creative investment bankers, over-zealous mortgage lenders, Government Sponsored Enterprises (Fannie Mae and Freddie Mac), conflicted ratings agencies, sleepy investors, brainwashed media – and of course Chinese and Middle Eastern investors, if you subscribe to the view that their buying of Treasuries kept long term rates low.
So how do you solve the problem? William Dudley at the Fed says central banks should focus more on regulation to prevent bubbles than on interest rate policy. But will politicians ever really clamp down on bubbles? Can we really spot bubbles? Who will identify the bubbles? Should we do anything about them, and what are the effects if we do? Perhaps regulators should look east for inspiration as Chinese authorities look to clamp down on lending as the result of what appears to an overly exuberant property market. If any government has the tools to burst a bubble it is the Chinese.
Meanwhile, many investors are telling us that they see bubbles closer to home. Many wonder if demand for government debt can be maintained. Could the Greek tragedy be played out elsewhere? This is one bubble that governments clearly have the power to burst, but they might not want to – so much for the view that the answer to bubblenomics is for governments to step in. So how do you solve a problem like bubbles? The answer, I’m afraid, is that nobody really knows.
Anna Edwards co-anchors Capital Connection weekdays on CNBC.