Monday, November 16, 2009

Bernanke Says ‘Not Obvious’ Asset Prices Misaligned (Update2)

By Scott Lanman

Nov. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

The U.S. central bank chief didn’t address asset prices outside of the country. Financial officials in Japan and China, Asia’s two largest economies, said this week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

Bernanke said in his speech that the “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery, warranting continued low borrowing costs. Bernanke also said the Fed is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

Stocks in the U.S. extended gains after his comments, while the dollar slumped against the euro for a second day as traders doubted Bernanke can do much to bolster the currency.

Stocks Rose

The S&P 500 Index rose today 1.5 percent to 1,109.30. The price of gold has climbed 55 percent in the past year to $1,142.65 an ounce, reaching a record today for the fourth time in six sessions. Crude oil is up 77 percent in 2009.

The dollar weakened to $1.4974 per euro from $1.4903 on Nov. 13.

The U.S. economy has suffered two booms and busts in asset prices -- one in technology stocks and the other in housing -- in 10 years. Economists have blamed former Fed Chairman Alan Greenspan for standing aside in the first, and aiding the second by keeping interest rates too low earlier this decade.

On the possibility of using interest rates to pop bubbles, “we can never say never,” Bernanke said today. “We have to keep an open mind.”

In some markets, including U.S. stocks, gold and oil, “there may not necessarily be a bubble, but you certainly have valuations that are above where near-term conditions would suggest they’re going to be at,” said Keith Hembre, chief economist at U.S. Bancorp’s FAF Advisors Inc. in Minneapolis, which oversees $103 billion.

‘Robust Improvement’

“They’re certainly priced for robust improvement,” said Hembre, who previously worked at the Fed.

Bank of Japan Governor Masaaki Shirakawa said earlier today that emerging economies “might overheat and experience financial turmoil,” while Liu Mingkang, China’s top banking regulator, yesterday called risks from low rates and the dollar’s weakness “new, real and insurmountable.”

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing.

Donald Tsang, the chief executive of Hong Kong, said Nov. 13 that record-low U.S. interest rates are encouraging investors to borrow dollars cheaply to invest in Asian stock markets, driving up asset prices in Korea, Taiwan, Singapore and Hong Kong “to levels that are incompatible or inconsistent with the economic fundamentals.”

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