With U.S. equity markets making new record highs on a weekly (if not daily) basis, there’s been a notable increase in the amount of “bubble talk” recently, said talk normally reaching a crescendo in the days leading up to another Federal Reserve policy meeting.
That’s exactly what’s happening early this week in advance of a gathering of central bank officials as reports like Is the Fed fueling a giant stock market bubble? at USA Today via Motley Fool present graphics like the one below before answering their own question with an emphatic ‘No’. Stock investors are comforted with logic such as “the fact that the Fed’s monetary policies have caused stock prices to soar, doesn’t mean there’s a bubble”.
A more thoughtful take on the subject is offered up by none other than Dallas Federal Reserve President Richard Fisher who notes The Danger of Too Loose, Too Long in the Wall Street Journal that includes the following conclusion:
…with low interest rates and abundant availability of credit in the nondepository market, the bond markets and other markets have spawned an abundance of speculative activity.
There are some who believe that “macroprudential supervision” will safeguard us from financial instability. I am more skeptical. Such supervision entails the vigilant monitoring of capital and liquidity ratios, tighter restrictions on bank practices and subjecting banks to stress tests. All to the good. But whereas the Federal Reserve and banking supervisory authorities used to oversee the majority of the credit system by regulating depository institutions, these institutions now account for no more than 20% of credit markets.
My sense is that ending our large-scale asset purchases this fall will not be enough.
I’ll never forget former Fed Chief Alan Greenspan telling Congress back in 2004-2005 how U.S. banks showed no signs of stress when, meanwhile, the “shadow banking system” was a veritable Wild West in mortgage lending. I’d say the odds are pretty good that the term “macroprudential supervision” will come back to haunt current Fed Chair Janet Yellen.