Prof. Dr.M.Shamsul Haque
The FE published a FT syndicate paper on the above topic on January 2, 2011. Many other people also wrote on the topic under different headings. The basic facts stated in these papers is that there is a glut of savings in the developed economies mostly due to dearth of investment opportunities in these countries under the slow economic growth conditions( growth recession) prevailing since the financial crisis began in 2008. Reportedly equity funds were sitting on $600 billion for investment in purchasing assets globally for earning good returns.
In their paper the writers Kevin Brown and Toni O’ Laughing wrote as follows:
“Emerging Asia’s central banks are imposing fresh administrative controls on local banks as fears rise of volatile currency movements and asset price bubbles caused by the knock on effects of loose US monetary policy”.
Predicting greater inflow of cash from the developed countries the paper described the various measures taken by Indonesia, South Korea and Thailand to restrain the inflow of cash. They also adopted measures to stop sudden outflows of such foreign funds that caused havoc in these economies in the financial crises of 1997-1998. Some economists said “The Central Bank’s (Indonesia) main objective was to release upward pressure on asset prices, which have been rising fast”. Inflation is also rising in these countries, but the authorities are “reluctant to raise interest rates further for fear of attracting even stronger financial flows”: This is the dilemma faced in many other emerging markets.
In Bangladesh the year 2010 saw doubling of stock market indices in DSE & CSE and similar rise in the prices of real estates in urban areas. That assets are over valued here can be judged from the total market value of stocks that has reached 50% of the value of GDP towards the end of 2010. What would be the total value added by the 200 or so listed companies in stock markets? No estimate is available but it may not exceed 10-15% that indicates the building of asset price bubble. It is also not known what is the value of the real estates in DCC area. It may now exceed the total value of the GDP of Bangladesh. It is known that when such a bubble developed in Japan in early 1990s the value of land under the imperial palace in Tokyo was estimated to be equal to the total value of land in California, the largest state in USA.
Why this has happened in Bangladesh is known to most of the people as reports published recently in the dailies in Dhaka. The banks and other financial institutions in Bangladesh have been heavily engaged in the two sectors and there are also inflows of funds from abroad under various categories. A few equity investments firms from abroad have set up business in Bangladesh. Our wage earners remittances are also placed in the stocks & real estate markets.
Over all the capital and real estate markets in Bangladesh are showing symptoms of asset price bubble that needs to be closely checked by the authorities. The formal definition of asset price bubble is as follows:
“An asset price bubble is characterised by a surge in prices that raises expectations of further increases that generate a succession of increases until confidence falters, the bubble “bursts”, and prices rapidly revert to an objectively-based level. “
That is the story behind many such bubbles all over the world. The 1996 seam in DSE was one such bubble that saw trebling of DSE index and then it collapsed and rested finally to its earlier level. If that happens again in 2011 then the AL government will face serious problem in raising confidence of the people again on the market with adverse effects on investment in the country. This will dash down all hopes in attaining MDG goals. The GOB should sit with those who created the bubble and made extraordinary gains during the year 2010. Otherwise millions of small investors will suffer losses and many families will be ruined.
Writer is a professor of finance and Vice Chancellor, Northern University Bangladesh.
