Tales from the Trail

White House adviser nods to bubble risk in China

December 1, 2009

He was probably only trying to be funny. But White House economist Austan Goolsbee touched a raw nerve by inferring Chinese investors currently exhibit the same kind of bubble mentality that Americans displayed prior to the collapse of the U.S. technology stock bubble in 2000.stocks

Goolsbee, chief economist to Obama’s Economic Recovery and Advisory Board, was asked if poll findings that 72 percent of Chinese would invest money in technology stocks, versus 60 percent of Americans who would put it in a bank, meant the United States had lost its nerve on taking risk.

“We are in a deep recession. It is clear that that has scared people,” Goolsbee told a panel at a conference on innovation and the economy sponsored by Intel Corp. and the Aspen Institute.

“I bet in 1999 in the U.S., we’d have had 72 percent saying ‘yeah, I want to invest in a tech company’. Give them a few popping bubbles, and maybe they’ll be putting it in the bank,” he said.

Surging U.S. technology stock prices peaked in March 2000, with the subsequent collapse tipping the economy into a short recession.

Analysts warn that China is ripe for a bursting bubble of its own. The country’s benchmark Shanghai Composite Index closed on Monday at 3,235, back from a recent peak above 3,470, but almost twice its trough during last year’s global financial crisis around 1,700.

“Did you see The Onion headline? They had a joke headline: ‘Nation Demands New Bubble To Invest In’. There is a sad grain of truth to that,” Goolsbee said, referring to the satirical U.S. publication.

Candid, but not very diplomatic.

Obama just got back from a trip through Asia where he tried to encourage China to do more to boost domestic spending and allow its yuan currency to appreciate, which the United States hopes would make it easier to sell exports into this fast-growing market.

Photo Credit: Reuters/stringer (Electronic board showing stock information at a brokerage house in Wuhan, Hubei province, Nov. 2, 2009.)

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