Who Were the Sea Peoples?

"A modern example of this conundrum [of thinking that one can outguess financial markets] occurred when many pundits blamed the Fed for missing a housing bubble that was also missed by the financial markets." -- The Midas Paradox , p. 12 Let's consider a single market, say, for tulips. Obviously it is either a nonsense claim, or a tautological claim that there are no bubbles, to say that if there is a bubble in the tulip market, the tulip market ought to have spotted it. For the tulip market participants themselves to detect a bubble would be for the tulip market participants to prevent said bubble! We can divide bubble theories into three broad categories: collective irrationality theories, partial information theories, and prisoner's dilemma theories. In collective irrationality theories, a "mania" gets going in some market, and market participants buy because they are carried away by their "animal spirits." Per these theories, someone outsi...

From a very interesting paper using a predator-prey model to capture the business cycle: "From a financial markets viewpoint, the implication is of course that everyone could be buying a stock that each one of the investors privately thinks is overvalued, but which nevertheless keeps soaring because the purchase decision is not made on the basis on one's individual assessment of the asset value itself but of everyone else's assessment: in short, this interpretation says that, in a financial 'bubble', an asset price would go up because everyone is buying it, and everyone would buy it because it is going up, regardless of its fundamentals." This definition seems sound to me, and contra Scott Sumner, it shows how we can have a bubble even if we cannot reliably profit from the fact that it exists: we have no idea how long people will keep buying an asset because everyone else is buying it.

Scott Sumner writes : "Bubbles are caused by asset prices crashes, just as mountains are caused by valleys." Sumner's contention is thatwe only see "bubbles" when NGDP crashes, and leads to a steep price decline in the asset class that we then declare to have been in a bubble. Well, first of all, mountains aren't caused by valleys! The land surface of the Earth would not be a 29,000 plateau if not for those pesky valleys: tectonic plates collide, and lift up mountains. So the metaphor is bad, but what about the economic analysis? Sumner says: "The 1920s and the Great Moderation both saw relatively stable NGDP growth. So why the big bubbles? Because NGDP growth crashed in 1929-30 and 2008-09. In 2008-09 NGDP growth slowed by 9% relative to trend, nothing like that happened in the 1970s. It was the crash that (partly) created the bubble. Without the crashes, we wouldn’t even be talking about the great stock bubble of 1929, or the great housing bu...