Fed: Get Used to the Bubble Economy

Bubble

“House prices have risen by nearly 25 percent over the past two years,” Ben Bernanke said in 2005. ”Although speculative activity has increased in some areas, at a national level, these price increases largely reflect strong economic fundamentals.”

If the Federal Reserve had a favorite brand of gum, it would undoubtedly be Bubblicious, an American classic known for producing large bubbles and short-lasting flavor. While blowing bubbles can be fun while it lasts, there is usually a sticky mess to clean up at the end. And despite the lessons of yesteryear, at least one central banker believes investors should get used to the boom-and-bust cycle.

A financial bubble occurs when a rapid expansion in a particular market or asset is followed by a steep contraction. Prices — driven by unwarranted enthusiasm — rise far above where they should be, considering fundamentals or intrinsic value. Examples in recent years include the tech bubble that peaked more than a decade ago and the housing bubble that punctuated the Great Recession.