Warning: Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests
By Daniel at 13 November, 2009, 12:16 pm
http://www.bloomberg.com/apps/news?pid=20601080&sid=a9xbDq__Y7v4
Nov. 13 (Bloomberg) — The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.
“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.
Fed Chairman Ben S. Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. Tsang’s warning contrasts with pledges by the Group of 20 nations that represent the world’s biggest economies to keep stimulus measures in place.
“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.
“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”
Past Experience
Tsang was Hong Kong’s financial secretary during the 1997- 98 Asian crisis, when countries from South Korea to Indonesia were forced to borrow from the International Monetary Fund because of an investor exodus sparked by concerns officials couldn’t maintain the value of their currencies. Together with Hong Kong Monetary Authority chief Joseph Yam, he intervened to buy $15 billion of Hong Kong stock, successfully defending the territory’s exchange-rate peg to the dollar.
Hong Kong’s interest rates track those of the U.S. because of the currency’s peg to the dollar, which means that foreign capital flows into stocks and property. Real estate prices in the city have risen more than 25 percent this year, prompting the International Monetary Fund to warn this month of a possible bubble. Hong Kong Financial Secretary John Tsang said Nov. 4 the government was “very concerned” about the rise.
Some academics and economists say Asian policy makers should do more to stave off asset bubbles.
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