Darling Seeks G-20 Plan to Deal With Asset Bubbles

By Gonzalo Vina and Emma Ross-Thomas

Nov. 6 (Bloomberg) -- U.K. Chancellor of the Exchequer Alistair Darling said the Group of 20 nations should develop a way to tackle asset-price bubbles as the world’s leading economies recover.

“We have got to make sure we don’t get ourselves into a situation where some pressure starts to rise and then it becomes bigger and bigger and when the whole thing comes to an end it has catastrophic consequences,” Darling said in an interview with Bloomberg Television.

The comments help shape the agenda for a meeting of G-20 finance ministers hosted by Darling today in St. Andrews, Scotland. They echo calls from the International Monetary Fund and Nouriel Roubini, the New York University professor who predicted the crisis that began in 2007.

The Federal Reserve, the European Central Bank and the Bank of England this week moved to unwind some of the emergency steps they took to rescue the world economy from its sharpest slump since the Great Depression. Finance ministers today also will discuss a strategy to exit their fiscal stimulus measures.

Near-zero interest rates in the U.S., Britain and Japan are depressing the dollar and fueling a surge in asset values, Roubini said on Nov. 1. Commodities led by gold are trading near record highs, and cheap borrowing costs are pushing up property and equity prices.

‘Bubble-Building’

“We also have this concern,” Russian Finance Minister Alexei Kudrin said in an interview in London yesterday. “We need to be very careful with this huge amount of injected liquidity.”

Henrique Meirelles, the Brazilian central bank governor, told reporters on Nov. 3 in Oxford, England, that “there’s a need for international cooperation in preventing imbalances and bubble-building and some of that demands international regulation, symmetry of regulation among several countries.”

Darling wants to incorporate any plans on asset prices into a broader framework of rules aimed at policing the global economy and stepping up oversight of banks blamed for causing the market turmoil over the past two years.

Finance ministers and central bankers gather in the golfing resort town north of Edinburgh this evening and will conclude their meetings about 4 p.m. tomorrow. Divisions remain about whether bubbles can correctly be identified and deflated without hurting the economy.

Head Off Problems

The G-20 must “guard against problems arising in the future and head them off as they develop,” Darling said in the interview, which was taped yesterday.

Fueled in part by record-low interest rates, the value of stocks worldwide has more than doubled to $47 trillion from this year’s low on March 9. Oil passed $80 a barrel on Oct. 21 for the first time in a year, and gold reached an all-time high of $1,097 an ounce on Nov. 4.

U.K. house prices climbed 1.2 percent last month to an average of 165,528 pounds ($270,000) after rising 1.5 percent in September, according to Halifax, a division of Lloyds Banking Group Plc. Hong Kong-based Henderson Land Development Co. said it sold an apartment in the Chinese city for a world-record price of HK$439 million ($56.6 million).

Using monetary policy to puncture bubbles would undo a previous consensus in which central bankers largely left investors to decide when asset prices were overvalued and then acted to address the economic aftershocks of market corrections. Central banks in Australia and Norway recently noted rising property prices when raising interest rates.

Tighter Regulation

Some central bankers including Bank of England Deputy Governor Paul Tucker promote tighter regulation as a better way of restraining speculation. Fed Chairman Ben Bernanke said in 2002 when he was a governor at the central bank that “monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy.”

The IMF says central banks “should examine what is driving asset-price movements and be prepared to act,” the Washington- based lender said in its latest World Economic Outlook, published on Oct. 1.

A survey of 147 clients by New York-based Goldman Sachs Group Inc. found 75 percent think low rates are triggering “too-strong” climbs in assets.

Even as they kept interest rates on hold, the Bank of England and ECB both signaled yesterday that they may be approaching the end of their emergency stimulus policies. A day earlier, the Fed outlined the circumstances in which it would be prepared to raise rates.

Phasing Out Liquidity

The U.K. central bank increased its bond-purchase program by the lowest amount since the program began in March. ECB President Jean-Claude Trichet said emergency liquidity measures would be “phased out” in a “timely and gradual fashion.”

G-20 leaders at September’s Pittsburgh summit ordered finance chiefs and the IMF to develop a framework to guide their efforts to shift the world economy away from U.S. demand and Chinese savings. Economists have blamed distortions such as the U.S. trade deficit for helping trigger the crisis.

Some G-20 members will likely push Asian nations such as China to allow their currencies to appreciate, Geoffrey Yu, foreign-exchange strategist in London at UBS AG, told clients in a report today. China, the world’s third-largest economy, has prevented the yuan from gaining since July 2008.

Darling said mapping out a long-term architecture and a system to permit the G-20 to monitor each member nation’s policies will be a more pressing objective than shorter-term issues such as the fall in the value of the dollar.

Currency ‘Volatility’

“There has been a lot of volatility in markets for obvious reasons over the last 12 months,” Darling said. “What we need to do over this weekend is to concentrate on laying the foundations for the future.”

French Finance Minister Christine Lagarde said yesterday that she will use the talks to urge counterparts to implement agreements to crack down on banker pay. Almost three in five traders, analysts and fund managers polled by Bloomberg last month said they believe their 2009 bonuses will either increase or won’t change.

“I will ask my fellows at the St. Andrews meeting to apply all the rules that have been decided upon,” Lagarde said yesterday in Paris.

The G-20 members oversee about 85 percent of the world economy and are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net; Emma Ross-Thomas in St. Andrews, Scotland at erossthomas@bloomberg.net.