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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).

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.

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