How do we know when irrational exuberance has unduly escalated asset values?
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?
We are in a big, fat, ugly bubble. And we better be awfully careful.
The Internet bubble circa 2000 is the most extreme in modern capitalism. In the 1930s, we had the worst depression in 600 years. Today is almost as extreme in the opposite way.
Bubbles and crashes are textbook examples of collective decision making gone wrong. In a bubble, all of the conditions that make groups intelligent - independence, diversity, private judgement-disappear.
Greenspan's eventual explanation for the growing gap between stock prices and actual productivity was that, fortuitously, the laws of nature had changed -- humanity had reached a happy stage of history where bullshit could be used as rocket fuel.
Indeed, bull markets are fueled by successive waves of prior skeptics finally capitulating as their fears fade. Eventually, fear turns to euphoria, and that's the stuff of bubbles.
But all bubbles have a way of bursting or being deflated in the end.
