Column: Beware the bubble, get new ideas

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: Something unprecedented is happening in the global financial markets all over again. We are seeing asset-price bubbles building in commodities, real estate and equities barely a year after the world suffered its worst recession since the Great Depression. History tells us that after a severe recession, asset prices take a long time to recover. But this time around, asset prices are rising back to the pre-Lehman levels very fast. Driven by massive liquidity, the financial economy is yet again running way ahead of the real economy. Some Wall Street leaders are worrying about this rather strange phenomenon.

For instance, the speculative trading volumes in oil have now hit an all-time high, almost close to the levels that existed before the collapse of Wall Street firms last September. Daily trading volumes in oil are about 16 times the actual underlying demand. In normal times, oil trading volumes were about 4 to 6 times the underlying demand. Real estate prices in cities such as Mumbai, Hong Kong, Shanghai and Singapore are also inching closer to their 2008 peaks. Equity prices have run up quite high in most emerging markets in the past six months, even if we are witnessing a slight correction now.

More importantly, the balance sheets of Wall Street firms are yet again getting leveraged higher on the back of rising asset prices. Their asset size had gone up to 30 times their capital base before the Wall Street crisis last year. The leverage came down to about 13 times after the crisis had played out. Now they are rising again to about 17 times their base, according to analysts. So, are we getting back to square one, is the question that must be asked seriously.

Have we forgotten all the lessons we were supposed to learn after the Lehman collapse? One had thought the one benefit of the global financial crisis was that it would force economic agents to acquire new knowledge in regard to what might happen in the future. For both governments and central bankers, the past has ceased to be an accurate guide for determining future policy.