Interesting discussion of hedge funds and housing by Tom Abate at the San Francisco Chronicle. After what’s come to be the usual discussion of bubble, Abate takes the extra step of delineating asset bubble theory:

– The low worldwide interest rates of the past few years could have encouraged speculation in certain categories of assets similar to the stock market bubble of the late 1990s.

– Such easy money has flowed especially into housing, as buyers took advantage of low rates, and into hedge funds, lightly regulated investment pools for institutions and the rich.

– If housing prices or hedge funds went bust, consumers could retrench and major financial institutions could be endangered, damaging the global economy.

– The possibility of bubblelike conditions means that the Federal Reserve and other central banks can’t raise interest rates too fast as they battle inflation for fear of triggering such a crash.

(Nicely done!)

Housing, hedge funds spur bubble worries
Some experts fear low interest rates may have pumped too much cash into global markets
Tom Abate
San Francisco Chronicle, May 21, 2005

Category: Markets

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3 Responses to “Asset bubble theory”

  1. Josh says:

    Sounds like the monetary theories discussed in Marc Faber’s excellent book “Tomorrow’s Gold.”

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  3. Johannes Kepler says:

    Interesting thing is that it might not be interest rates that do it. Some counties (e.g. Cook County – Chicago) are raising property taxes and people are suddenly finding themselves on the hook for thousands more than they expected.