Newspaper article The Christian Science Monitor

Irrational Effervescence?

Newspaper article The Christian Science Monitor

Irrational Effervescence?

Article excerpt

A Federal Reserve official leaked to The Wall Street Journal last Monday the news that Fed policymakers, at a March 31 meeting, agreed that an increase in interest rates is more likely than a decrease.

The news sent stock and bond prices plunging sharply.

That, some economists suspect, is just what the Fed wanted. It would like to let some steam out of financial markets and slow the economy a little. "Having articles like that appears just as useful as tightening policy itself," says David Hale, chief economist at Zurich Kemper Investments in Chicago. Mr. Hale sees a risk of a "bubble economy" developing in the United States, with prices of stocks and commercial buildings inflated beyond reason by a speculative binge. Already, share prices have bounced back from last Monday's plunge. "There is a danger of getting {a bubble}," says Paul Kasriel, chief US economist of Northern Trust in Chicago. "By most accounts, stocks are overvalued.... But we aren't in a bubble economy yet." Fed Chairman Alan Greenspan raised the specter of "irrational exuberance" in the stock market in a December 1996 speech. After a sharp dip, stocks kept going up. So, though, did company profits. Mr. Greenspan's concern then, and that of some economists now, is that the US could suffer the fate of Japan in the 1980s. Stock and real estate prices there zoomed skyward until December 1989, when the bubble burst. Japan's economy has been struggling to recover from that mess until today. Neither Mr. Hale nor Mr. Kasriel see the same extremes in the US as in Japan in the 1980s. But they do see some similarities. Pressed by the US to reduce its international payments surplus by boosting its economy, Japan pumped up its money supply - the fuel for economic growth. It rose at an 11 to 12 percent annual growth rate in 1988, just a little slower in 1989. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.