The global devastation unleashed by the spectacular bursting of the U.S. housing and credit bubbles has left deep scars, provoked an unprecedented government response and stoked fears that any sharp new rise in asset prices means another round of bubbles is brewing.
Plenty of analysts say such worries are overdone, that most assets are merely recouping some of the ground lost during the meltdown of 2008 and that any overheating - whether in U.S. Treasury bonds, emerging market equities, Chinese property or Canadian housing - will be corrected in due course by market forces. If not, putting curbs on leverage would quickly do the trick.
But others insist the sequel to The Attack of the Killer Bubbles is already playing out around the world and that the extraordinary government measures designed to stabilize the financial system ought to be placed at the top of the credits.
"Unfortunately it seems like the worst-case scenario is unfolding in front of us," says Doug Noland, a senior portfolio manager with Federated Investors in Pittsburgh and a long-time bubble watcher. "It's in play now."
The world is awash in easy money poured into markets by policy makers to revive credit and prevent a full-blown depression.
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"Excessively loose monetary policy causes asset bubbles and excessively loose monetary policy is what we have now," says Harvard University financial historian Niall Ferguson. "It's a little early to start pointing fingers and calling things 'bubbles,' however."
But Mr. Noland and a handful of other increasingly vocal critics warn that we are already faced with a massive new global bubble different from previous ones, which were largely inflated by a combination of cheap credit and hot speculative money chasing the latest craze - whether it be tulips, railways to nowhere, Florida swampland, worthless dot-coms or securities backed by junky mortgages.
Every major bubble in history - from the legendary South Sea and Mississippi scams that ruined private investors and destroyed public finances in the 18th century to the Internet-stock craze of the 1990s and the housing mania of the mid-2000s - has been aided, abetted and sometimes spawned by government policies. But they could all be dwarfed by what one observer has labelled the "Quantitative Bubble," if the darkest predictions come true.
"The world is devoid of a monetary anchor and operating in a unique monetary environment that foments speculation, financial excess, imbalances, economic maladjustment and potent bubble dynamics," Mr. Noland wrote last month in his Credit Bubble Bulletin.
"The year 2008 marked the collapse of the Wall Street/mortgage finance bubble. It specifically did not mark the end of the Chinese Bubble, the global Credit Bubble or even the greater U.S. Credit Bubble."
And then along comes what Mr. Noland has dubbed the "Global Government Finance Bubble."
He has proclaimed 2010 "a bubble year" and warns that excesses could surface anywhere. He already sees the telltale signs in U.S. Treasuries, mortgage debt issued by U.S. agencies and frothy emerging-market equities and bonds.
People seem to see a bubble everywhere they turn. It actually takes a long time to develop a major bubble. — Harold Vogel, author of Financial Market Bubbles and Crashes
Yet not even the experts find it easy to spot true bubbles in the making or identify them before they blow up.
