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i just got through reading an e-book version of "A Bubble that broke the world" by Garrett that is available at fraser books.

The essential thesis of this book, originally published in 1932, is that there are fundamental processes that create financial bubbles. First, there must be a multi-year period of rising prices with no let-up. Second, the concept that one may be able to build wealth through investment changes to a belief in outright entitlement (if i hold it long enough i will definitely make money). Third, the most recent period of prosperity is thought to be predominately a result of a new economic paradigm rather than cyclical forces or credit expansion. And finally, credit is adopted as a panacea for debt, that is, debt levels are rationalized by the notion that credit will be available for refinancing and restructuring if and when necessary.

tr
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Garrett's thesis appears to emphasize the behavior and rationalizations of individual investors.

I would suggest that a possible additional factor that might contribute to the creation of financial bubbles is the (in)action of policy makers.

As you probably know (and as Steven Roach reported in this morning's report), the Federal Reserve recently released FOMC transcripts from 1996. Those transcripts include discussions among Governors worried about an emerging bubble at that time. I would refer you to p. 25 for Lawrence Lindsey's initial broaching of the concern for a bubble, and pp. 30 & 31 for Chairman Greenspan's acknowledgement of a bubble ("I recognize that there is a stock market bubble problem at this time." p. 30) (Pages refer to those of the transcrips, not pages in Acrobat).
http://www.federalreserve.gov/fomc/transcripts/1996/19960924Meeting.pdf

My point is that Garrett, whose book I do not know but would no doubt enjoy, appears to discount the contribution of policy makers to the processes that create financial bubbles: at least, policy makers probably enjoy some capacity to supress a gathering bubble.

Of course, those policy makers who thus act will enjoy precious little political credit for having prevented the possible emergence of something whose likelihood or existence is invariably doubted by the vast majority of investors subject to the behavior Garrett observes. Thus, I am far less ready in 20-20 hindsight to condemn Greenspan, than Roach appears ready, if his final paragraph this morning is any indication:

In the end, the lesson is painfully obvious. The asset bubble is one of the greatest hazards that any economy or financial system can face. From Tulips to Nasdaq, the record of history is littered with the rubble of post-bubble economies. It takes both wisdom and courage to avoid such tragic outcomes. Sadly, as the full story now comes out, we find that America's Federal Reserve had neither.

Jimi
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I did a search for +Garrett +Bubble and discovered that he also wrote Where the Money Grows. I am seriously considering buying this book. You get Anatomy of the Bubble thrown into the book as well. http://www.josseybass.com/cda/product/0,,047123897X,00.html
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The Fed is sort of forced to not take any action!

If they take any action, it either stops the bubble or it doesn't. If it stops the bubble investors get all mad at the Fed for cutting off their gains; companies complain that they can't expand like they want to because credit is too tight & interest rates are too high. The fed has to stave off a major lobbying effort (politically costly) and gets accused of mishandling the economy.

If the Fed's action doesn't stop the bubble, the investors still get resentful at it for messing with them. And then when the bubble pops, the investors, unwilling to blame themselves, will blame the Fed for destroying the market.

If the Fed doesn't take any action and the bubble does not develop, they look competent.

If the Fed doesn't take any action and a bubble develops, the Fed gets worshipped as the architects of the New Economy. [This happened.]
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