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On the Road to Recovery, or Creating the “Mother of All Bubbles”?

Financial Risk

Speakers: Joyce Chang, Managing Director, Global Head of Fixed Income Research, J.P. Morgan
Nouriel Roubini, Chairman and Founder, Roubini Global Economics
Presider: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics and Director, Maurice R. Greenberg Center for Geoeconomic Studies, Council on Foreign Relations
March 25, 2014

Event Description

With the tapering of the Federal Reserve's bond buying program well underway, and the possibility of future interest rate hikes under discussion, J.P. Morgan's Joyce Chang and Nouriel Roubini of Roubini Global Economics assess the risks that exist in the current global financial system in a discussion with CFR's Sebastian Mallaby. While the risk of financial contagion may have diminished since the time of the global financial crisis, significant dangers remain. The panelists examine the possibility that a prolonged period of zero interest rates by the Fed and other central banks could potentially inflate a new asset bubble.

This session was part of a CFR symposium, Risk and Strategy for the Changing World, which was made possible by the generous support of Rita E. Hauser, and organized in cooperation with King's College London.

Event Highlights

Joyce Chang on how risk in the financial system is now more localized and less systemic in nature:

"Russia and Crimea have been separated from, you know, necessarily thinking that this increases your risk in Latin America. And we haven't seen the type of contagion, you know, play out. So that doesn't mean that the risk has gone away. It's just shifted with respect to market reactions to it. And I think it has become more bottoms up in nature, and less about the solvency and stability of the over-all system."

Nouriel Roubini on the risk that the Fed's unconventional monetary policy could create a new financial asset bubble:

"So the risk is actually that the Fed exits too slowly. Why? The economy is growing slowly, unemployment is high, inflation is still low. But then, because of that, the risk is that we're going to cause another financial bubble. Right? There's already frothiness in credit market, frothiness in some real estate market around the world, frothiness even in equity markets like the U.S. tech sector, biotech, and otherwise."

Nouriel Roubini on how widening inequality and a lack of job prospects increases instability and risk in the global financial system:

"And the problem is that if you're having these technological changes, trade and globalization, you're not going to create jobs, blue collar and white collar, and you have rising income and wealth inequality, eventually there will be a social and political backlash. Especially in a world in which the welfare state is shrinking because of the fiscal cost. We've also demographic aging and other long term fiscal issues. It's reaching a boiling point."

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