Nobel winner warns of financial bubble

An American who won this year’s Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly.

Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles, pinpointed the US stock market and Brazilian property market as areas of concern.

“I am not yet sounding the alarm. But in many countries, stock exchanges are at a high level and prices have risen sharply in some property markets,” Mr Shiller told the German magazine Der Spiegel yesterday.

“That could end badly,” he added.

“I am most worried about the boom in the US stock market. Also, because our economy is still weak and vulnerable,” he said, describing the financial and technology sectors as overvalued.

He had also looked at “drastically” higher house prices in Rio de Janeiro and Sao Paulo in Brazil in the last five years.

“There, I felt a bit like in the United States of 2004,” he said, adding that he was hearing arguments about investment opportunities and a growing middle class that he had heard in the US around the year 2000.

The collapse of the US housing market helped trigger the 2008-09 global financial crisis.

“Bubbles look like this. And the world is still very vulnerable to a bubble,” he said.

Bubbles are created when investors do not recognise when rising asset prices get detached from underlying fundamentals.

Reuters


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