Newspaper article THE JOURNAL RECORD

Floating on Financial Bubbles

Newspaper article THE JOURNAL RECORD

Floating on Financial Bubbles

Article excerpt

WASHINGTON -- Forget the nirvana economy. With a stock market surging into the stratosphere and merger mania overtaking the banking system, some people envision a doomsday scenario. They believe America has a bad case of the "bubbles" -- financial froth that eventually will lead to a crackdown by the Federal Reserve and a severe recession.

A recent issue of the respected The Economist magazine offered a cover story entitled America Bubbles Over, in which it contended that the stock market's 30 percent increase in just the past year, the rash of multibillion-dollar bank mergers and rising real estate prices all point to an economy exhibiting dangerous signs of excess.

"Just as champagne tastes wonderful until the bubbles go to your head, so financial bubbles tend to create nasty economic hangovers," the British magazine wrote. It argued that the U.S. episode would likely end with the central bank having to calm the speculative fever by jacking up interest rates, possibly pushing them so high as to cause a recession. Some American economists agree there is cause for concern. "We do seem to be in a classic speculative boom," said Robert Dederick, economist at Northern Trust in Chicago. "There are signs that the market is pulling away from what have been good fundamentals and extrapolating them into the future in an unrealistic way." The underlying U.S. economy has been remarkable. The current economic expansion has just entered its eighth year, the third longest period without a downturn in history. What is even more remarkable, even though unemployment has fallen to levels not seen since the late 1960s, inflation pressures are falling, not rising. All the good news has led some to proclaim that the economy has entered a "new era" in which rising productivity is letting the economy run at a faster speed without triggering inflation or feeling the full brunt of the Asian economic troubles. But neither element is expected to do more than slow U.S. economic growth, causing only a slight rise in unemployment. "My favorite advice is `Don't worry, be happy,'" said David Wyss, senior financial economist at Standard & Poor's DRI. …

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