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Amazingly asset prices around the world have surged and some central banks are raising rates to “manage” potential asset bubbles…

Bloomberg reports that the Bank of Isreal and Norges Bank may raise rates this week… this follows the actions of the Reserve Bank of Australia raising rates in September…

Several points:

1. Global economic growth has been flat or tepid in 2009. So asset price appreciation signals something else.

2. All the additional “liquidity” provided to the US and global economies by the US Federal Reserve and other central banks has to be absorbed somewhere.

3. ~~~“A survey of 147 clients published last week by New York- based Goldman Sachs Group Inc. found 75 percent think low [interest] rates are triggering “too strong” climb[s] in assets.”~~~

4. ~~~ “When central banks crack down, “financial instability” will ensue as investors gauge their pain thresholds, said Ignis’s [Asset Management] [Stuart] Thomson, who helps manages about $100 billion.”~~~

From the BBG article …

~~~” While policy makers, including Bernanke, oppose specific targets for assets, they may be more willing to raise rates if markets begin to signal there is too much liquidity, said William White, Cecchetti’s predecessor at the BIS, which serves as the bank for central banks. They’re also looking to back tougher regulation by curbing leverage and pursuing so-called macro-prudential supervision to constrain lending excesses and monitor economic risks instead of focusing on individual banks.

Economic Fundamentals

Some central banks are eager to see assets rise to boost their economies, said Richard Batty, global-investment strategist at Standard Life Investments Ltd. in Edinburgh. The challenge remains how to conclude when prices no longer reflect economic fundamentals and whether anything can be done about it, he said.

“The major central banks will need to keep policy loose for some time, so it’s premature to start worrying about what to do with asset prices,” said Batty, who helps oversee about $200 billion. “Deciding whether an asset is cheap, fairly valued or expensive is a difficult proposition.”

When Bernanke was a Fed governor in 2002, he sided with Greenspan by saying “monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy.” He’s now likely to maintain a preference for revamping supervision such as by enforcing stricter capital rules on large banks to curb their risk-taking and leverage. Federal Reserve Bank presidents appear divided over whether interest rates should be used.

‘Slippery Slope’

“In certain circumstances, the answer as to whether monetary policy should play a role may be a qualified yes,” Janet Yellen, of San Francisco, said in June. By contrast, Philadelphia’s Charles Plosser said in an Oct. 22 Bloomberg Radio interview that trying to identify and head off asset bubbles is a “very slippery slope” and rates are a “very blunt instrument.”

In Asia, the central banks of South Korea and India are already signaling they may boost rates next year. South Korean home prices rose for a sixth month in August, while India’s Mumbai Stock Exchange Sensitive Index is up about 75 percent since January.

“Monetary policy must not neglect asset-price movements,” Qin Xiao, chairman of China Merchants Bank Co., China’s fifth- largest bank by market value, wrote last week in the Financial Times. It is “urgent that China shifts from a loose monetary policy stance to a neutral one,” he said.

Assessing Risks

The European Central Bank is studying asset prices as it reviews what to include when monitoring developments in money and credit growth as part of an assessment of the risks to price stability.

“Experience and developments in the literature appear to support a shift in favor of the adoption of some form of leaning against the wind,” PresidentJean-Claude Trichet said Aug. 22, adding he doubted it could be done in a “mechanical way.”

Bank of England Chief Economist Spencer Dale said last month he favored limiting its so-called quantitative-easing plan in August because he worried that spending more than 175 billion pounds might stoke asset prices too much.

Officials are “very doubtful” monetary policy can tame credit cycles, arguing that doing so in the last boom would likely have triggered a prolonged recession, Deputy Governor Paul Tucker said Oct. 22. A forthcoming discussion paper will instead outline instruments such as tighter collateral standards and risk measures banks could adopt to make their industry more resilient, he said.

Inflation Fighting

While tackling asset increases “may undermine” inflation fighting, a central bank can bolster its credibility by adopting a price-level target, requiring it to make up for past misses in the inflation goal, says Bank of Canada Governor Mark Carney. The bank is considering whether to introduce such a strategy after 2011.

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

When central banks crack down, “financial instability” will ensue as investors gauge their pain thresholds, said Ignis’s Thomson, who helps manages about $100 billion.

“Central banks will be more inclined than they were before to look at whether asset prices have gotten out of line,” White said. “We’ve seen what happens when markets go wrong.”~~~