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October 26, 2014

Why the Bubble Debates Aren’t Interesting

Tyler Cowen explains why he generally stays away from debates about whether or not the Federal Reserve’s monetary policies are creating a “bubble recovery.”

” I don’t find most predictive discussions of bubbles interesting, while admitting that such claims often will prove in a manner correct ex post.  ‘OK, the price fell, but was it a bubble?  I mean was there froth, like on your Frappucino?’… Good news and improving conditions may well bring more bubbles or greater likelihood of bubbles, but that is hardly reason to dislike good news and improving conditions.”

“I expect the real economy over the next twenty years to be more volatile than it was say in the 1990s.  In that sense, many current asset market prices may be revised and quite dramatically.  Still, I don’t find the bubble category to be so useful in this regard.  We really don’t know what is going to happen and that is why the current prices are wrong, not because of a ‘bubble.'”

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