Friday’s WSJ front page article, Bernanke’s Bubble Laboratory, is must reading:
"First came the tech-stock bubble. Then there were bubbles in housing
and credit. Chinese stocks took off like a rocket. Now, as prices soar
on every material from oil to corn, some suggest there’s a bubble in
But how and why do bubbles form? Economists traditionally haven’t
offered much insight. From World War II till the mid-1990s, there
weren’t many U.S. investing manias for them to look at. The study of
bubbles was left to economic historians sifting through musty records
of 17th-century Dutch tulip-bulb prices and the like . . .
study of financial bubbles is hot . . . Among their conclusions:
Bubbles emerge at times when investors profoundly
disagree about the significance of a big economic development, such as
the birth of the Internet. Because it’s so much harder to bet on prices
going down than up, the bullish investors dominate.
Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.
Manias can persist even though many smart people
suspect a bubble, because no one of them has the firepower to
successfully attack it. Only when skeptical investors act
simultaneously — a moment impossible to predict — does the bubble pop."
Its now at the free section of WSJ.com.
Bernanke’s Bubble Laboratory
Princeton Protégés of Fed Chief Study the Economics of Manias
WSJ, May 16, 2008; Page A1