So, what explains the recent rally in US and global asset markets?

America s financial crisis has triggered a severe credit crunch that is making the US recession worse, while the deepening recession is leading to larger losses in financial markets thus undermining the wider economy. There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.

There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.

Will it lead to a persistent increase in risky assets, especially in US and other global equity markets?

The connection between financial risk and asset price swings emerges from the use of a new approach Imperfect Knowledge Economics (IKE) to understanding risk and fluctuations in asset markets.

Routine phishing can affect any market, but our most important observations concern financial markets timely enough, given the massive boom in the equity and real estate markets since 2009, and the turmoil in global asset markets since last month.

Last year, the Fed s mere announcement that it would gradually wind down its monthly purchases of long term financial assets triggered a taper tantrum in global financial markets and emerging markets.

International agencies recently issued warnings about speculative excesses in asset markets, suggesting that we should be worried about a possible crisis.

Financial crisis are inevitable in the global marketplace.

The Trouble With Financial Bubbles

The yen has surged on world financial markets.

Instead, excess liquidity and fresh asset bubbles could emerge in the world s financial and housing markets, impeding, if not torpedoing, growth.

The types of risks traded on electronic marketplaces are steadily expanding.

Tensions in financial markets have hit new highs.

Markets are crowded, cafés are bustling.

Financial markets understood the impact of this and expected a devaluation.

We need to restore order to international financial markets.

Such taxes surely reduce liquidity in financial markets. With fewer trades, the information content of prices is arguably reduced.

Such taxes surely reduce liquidity in financial markets.

Yes, financial markets in troubled countries for example, Russia s currency, equity, and bond markets have been negatively affected.

The government increasingly tightened its policies as the economy continued to surge ahead due to asset bubbles, high local government investment spending, and buoyant demand in global markets for Chinese goods.

The letter criticizes Xi s policies, arguing they have led to an excessive concentration of power in the stock and property markets.

But, over time, the longer central banks create liquidity to suppress short run volatility, the more they will feed price bubbles in equity, bond, and other asset markets.

Asset recovery

But such revisions of Basel II are not enough, because bank portfolios especially those of international banks with large trading books are vulnerable to the risks stemming from long swing fluctuations in asset markets.

As a result, not only are countercyclical measures needed, but banks capital requirements should vary inversely with the boom and bust fluctuations in the asset markets to which they are heavily exposed.

Such events are commonly priced in the derivatives market, which puts the price for the S P event at ten cents on the dollar.

Why should it be any different in financial markets?

Instead, they are traded mostly over the counter in illiquid markets.

This Woman Sells Brooms and Sell them at Chinese Markets (Photo by Nang Nyi)

And when there are fewer assets to be held, their prices rise, too.

For example, falling home prices put more families in negative equity mortgages worth more than the home.

It may be too soon to say that many risky assets have reached bubble levels, and that leverage and risk taking in financial markets is becoming excessive.

Owners who sell these assets will gain roughly 800 billion relative to the pre merger value of their assets. The shareholders of the companies that buy will lose roughly 300 billion in market value, as markets interpret the acquisition as a signal that managers are exuberant and uncontrolled empire builders rather than flinty eyed trustees maximizing payouts to investors.

Owners who sell these assets will gain roughly 800 billion relative to the pre merger value of their assets.

Return and disposal of assets

In late 2007, when GDP growth hit 13 , the government adopted more restrictive anti bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction.

These achievements came during a period of remarkable stability in Europe s financial markets.

The crisis has affected both concentrated banking systems (for example, the UK and the Netherlands) and non concentrated systems (e.g., the US and Germany).

In fact, many emerging markets experienced declines in investment rates.

But it is now time to revisit the idea, at least in a modified and more nuanced form. Weak financial systems in emerging markets are a major obstacle to balanced development.

And why does the housing market in so many other countries now reflect similar conditions?

In more concentrated markets, banks tend to offer worse terms to customers.

Weak financial systems in emerging markets are a major obstacle to balanced development.

Vladimir Putin makes the most of the ruble's depreciation on currency exchange markets.