The granddaddy of all bubbles?

Phillip Toledano

By Peter Coy and Roben Farzad

It is as if 2008 was never produced. Once more the world investors are pumping of bubbles that are likely to explode in their faces. After the popping of a housing bubble led to the first global recession since the 1930s, global markets are scum as shaken Champagne. Experts claim identified price increases which are supported by economic fundamentals, active from U.S. agricultural land to Israeli biotech to Australian housing Chinese cemetery sites. Commodities have soared. Issuance of global junk-bond hit a record in the first three months of the year. And Robert Shiller of Yale calculates that the Standard & Poor 500-stock index was negotiated to 23 times earnings, standardized in the 10 years, compared to a historical average of 16. "I am afraid that it is the grandfather of all, a bubble encompassing almost right in the heart of the monetary system," explains Doug Noland, senior portfolio in the Federated Prudent bear Fund Manager.

Cassandre, pointing to bankruptcy, funded by taxpayer bailouts and caused by the last bubble, unemployment argue that bubbles of today must be deflated, now, until they get dangerously large. Many accuse the Federal Reserve to maintain low rates and pumping by a flood of money for performance that feeds of bubbles around the world. The Chinese authorities want that the Fed to raise rates to relieve inflation in China. On 7 April, the European Central Bank raised its benchmark loans at rates of a quarter-point to 1.25%. To the United States, "that we created is moral danger," said Brian Westbury, Economist at first Trust Advisors Chief, a fund store Wheaton (Ill.). "People come to believe that the market can go higher if the Fed does not help it.".

Not everyone is in the grip of the bubble-phobia, especially of Fed Chairman Ben Bernanke. The Central Bank remains committed to keep ultra low rates until the economy shows more staying power. In an April 11 speech in New York, Fed Vice President Janet l. Yellen said nothing on the bubble. But it rejected the contention that the policy of the Fed is responsible for rising prices of raw materials, blame swash at the price of oil and food in large part on "rising world demand and supply disruptions." She is right: products are not be hoarded, that they would be if investors were speculating on them. Inventories have fallen since last summer.

Some economists, such as Jaume Ventura and Alberto Martin of Universitat Pompeu Fabra Barcelona go so far as to say that the bubbles are the price to pay for vigorous growth. They say that the optimism reflected in the increase in prices can become a prediction: the rising prices cause more hiring and investment. That generates growth that justifies higher prices, and so forth in a virtuous upward spiral. Of course, eventually the pop bubble and causes a disorder. Still shaking a sawtooth economy, they say, is better than an economic regularization stuck in perpetual underperformance. "The bubble has a price." "But you bubble world prefer that without the bubble," said Ventura.

James w. Paulsen, strategist bullish investment Chief at Wells Capital Management in Minneapolis, come to think that the Fed should increase interest rates a little now - but, according to him, "it is comical that we believe that we can regulate away future recessions or crises." It is frightening to the extent, if we do, we will overwrite the essence of capitalism, which is basically greed and animal spirits. ?

Didier Sornette, a physicist who studied Finance at the Switzerland Federal Polytechnic in Zurich, sketches the six stages of bubbles: 1) the emergence of a new opportunity for investment; (2) the expansion of credit; (3) euphoria; (4) distress; (5) repulsion; (6) panic. Ventura and Martin assume same euphoria. In their "rational bubbles", investors buying a bubbly asset because they conclude that competing can last for many years, and the chance that they will always be as invested when the bubble bursts is low. For all those who sell before the bust, and all those who earn salaries of the sector while it is still bubbling, there is no disadvantage, they note.

It is difficult to choose between the camps and bubble - bubbles-are-bad are - O .K. because the bubbles are not all similar. Are the best create property whose value is survived the crash. The programme Apollo that put people on the Moon, to lose the support of the public in the 1970s, was a "social bubble" in which steam advanced science, Sornette said. Bad bubbles generate without active value as exurban housing subdivisions are supported by the squatters and molds. Other bubbles do not produce any response to any supply. The only impact of new China in the old wine - one bottle Mania went to near development $ last year - is to transfer wealth to anyone who had the chance to have the bottles before the Chinese not to interested partiesnote the Economist Edward Glaeser Harvard.

When the technology sector gets bubbly, consumers are often the largest beneficiaries, Glaeser, said, because investors finance ideas that help the general public, wireless data storage in the solid state to the Internet. It is thus in the 19th century with the rise of the railroad. Speculation today tech is concentrated in social networks. The question is whether if new investments will live up to the greatest hits - and productive busts - of the past to Silicon Valley.

Coy is editor of Bloomberg Businessweek economics. Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.

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