Les Jones

The Fed and asset bubbles, again

Tuesday, August 25th, 2009 | Economics |

Marginal Revolutions - Identifying and Popping Bubbles: Evidence from Experiments:

The last factor that does seem to make a difference is that bubbles liftoff and reach higher peaks when there’s a lot of cash floating around.  In theory, this shouldn’t matter, fundamental value is fundamental value. If an asset is worth $10 in expected value then it’s worth $10 whether you have $20 in your pocket or $200.  But in practice bubbles are bigger when cash relative to asset value is high.

Note that the latter experiments are consistent with the Fed having a significant role in bubble inflation (a theory I have not pushed).  In other words, rather than identifying and popping bubbles already on the rise, not blowing bubbles in the first place may be easier and more productive.

Tags: the fed

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