Crying...after setting fire

FT reports that "Germany’s new finance minister has echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar. Wolfgang Schäuble’s comments highlight official concern in Europe that the risk of further financial market turbulence has been exacerbated by the exceptional steps taken by central banks and governments to combat the crisis. Last weekend, Liu Mingkang, China’s banking regulator, criticised the US Federal Reserve for fuelling the “dollar carry-trade”, in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad. Speaking at a banking conference in Frankfurt on Friday, Mr Schäuble said it would be “naive” to assume the next asset price bubble would take the same guise as the last. He said: “More likely today is a scenario in which excess liquidity globally creates a new [sort of] asset market bubble.” He added: “That low interest rate currencies such as the US dollar are increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.Mr Schäuble, a political veteran, took over the German finance ministry after Angela Merkel began her second term as chancellor last month.
Further signs of official frustration about policy steps being taken elsewhere came from Lorenzo Bini Smaghi, a European Central Bank executive. He said in a speech in Paris on Friday that emerging Asian economies were continuing “strongly accommodative monetary policies” in spite of their faster economic recoveries. Separately, Jean-Claude Trichet, ECB president, issued his strongest warning yet that banks must control pay and bonuses. Striking a noticeably stiffer tone, Mr Trichet told the Frankfurt conference: “Profits earned should be used, as a priority, to build capital and reserves, rather than be paid out as dividends or excessive compensation.” The ECB president quoted a warning by Johann Wolfgang von Goethe, Frankfurt’s most famous son, on the need for self-restraint: “If I wanted to lavishly let myself go, I could well destroy myself and my environment. Mr Trichet said: “Compensation and bonuses must remain contained. Otherwise, we would take risks that Goethe [has] already described.”.."

While Mr. Trichet is a smart person and is respected, he should not be complaining and warning now after pushing enormous amounts of money into the system. When risk takers do not see any downside, why should they listen to Mr. Trichet or anyone else? There was a good opportunity to put fear into the system, which Trichet, Bernanke and others squandered.