Poisoning Indian Stock Markets

They thrive on the 'greater fool theory'. They are driven by the behavior of perennially optimistic market participants (the fools) who buy overvalued assets in anticipation of selling it to other speculators (the greater fools) at a much higher price. They have led to economic catastrophes like the Great Depression and the latest subprime crisis. They are threatening to bring the fastest growing economy to its knees. Yet economic "bubbles" as they are popularly called, are set to have a longer life.





Cheap liquidity which is the lifeline of global asset bubbles continues to find supporters in its birthplace - the US Fed. Determined to keep interest rates near zero long enough to drown global economy in surplus liquidity, the US central bank has refused to pay any heed to sensible economics. In their latest meeting, Federal Reserve officials repeated their pledge to keep interest rates near zero for an 'extended period'.



Economists in the US opine that the housing market will be able to weather the removal of the stimulus programmes once the economy begins to create jobs and banks ease up on credit. Well, if that is the logic for the US Fed's reluctance to raise interest rates, cheap liquidity is here to stay. For the US Treasury Secretary Timothy Geithner has himself expressed his concerns over unemployment rates in the US remaining elevated for longer than expected. US banks can try to ease up lending only if the US consumers get back to borrowing and spending. Each of these is therefore expected to add to the flow of cheap liquidity into emerging markets and risky assets. While China seems to be happy to accommodate it in its real estate sector, Indian regulators need to ensure that they do not poison Indian stockmarkets and real estate.