Irrational Exuberance -how to prevent large scale speculation; a challenge to the community
Lets begin with a quote from the ever popular Alan Greenspan.
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.
Allan Greenspan, in december 1996(!)
Central bankers have studied the crash of 29 and the downward spiral of the economy into the great depression like no other subject. Bernanke is one of the great authorities. But they (and almost all economists) asked the wrong question. All of their intellectual energy has been invested in answering the question what should be done after a great speculative wave in the markets crashes -how to prevent that the economy as a consequence falls into a depression. They forgot to ask the preceding question: how to prevent largescale speculative waves in the first place.
Greenspan in 1996 sensed that there was something going wrong. But he did not know how to act. Even today the lazy mainstream of economic thinking simply maintains that you cannot prevent largescale speculative waves cannot be prevented -thereby evading the question cowardly.
I think that this question is the most important question in economics today. (1) We are getting ever better in managing capitalism on the macro- meso- and micro-levels. How to prevent large scale speculative waves could be the last big open question ..with enormous positive consequences if we would find an answer. (2) I suspect that to answer this question we will be forced to integrate into one perspective the two large economic theories of our times (neo-classical and keynesian). That would be a great benefit for economical theory and the politics that go with it. (3) There is a real danger of a third speculative wave in the middledistance. I do no not think that we can withstand another one. If i may use a Dutch metaphore: the dikes will not hold against a third tsunami, the first two have weakened them to much. That makes the question how to prevent a third wave urgent.
I would like therefore to challenge the Caps community to answer this question.
How can large scale speculative waves be prevented?
Alstry, Bullishbabo, Ultralong, Binve, Florida, Deej, Chris, Donner, David from Quatar, Dwot, Sinchi,Abitare, Dragon and all the others that commendably think and write on macro-economic questions....How about it? Ideas? Thoughts? Theories? Suggestions?