Question

Wouldn't it be logical to consider that the boom in itself constitute a signal that a burst will occur in the near future?

I personally have a non-conventional opinion on boom and burst. I don't think that it's a clever idea to keep the boom going by artificial means. I would rather promote a strategy where the price depreciation is seen as a natural consequence of the boom itself. Impeding the market to react in a natural way and regain the balance, it might look like as a good idea at the first sight but in the long run it has been shown that this strategy has bad consequences for the poor. The statistics show that during the previous financial crises the gap between the rich and the poor widened and the current crisis has obviously the same type of effects. Easy access to easy money makes one rich(er), while the poor and unemployed will have to experience the reversed social trip (apropos of social mobility).
Jul 20, 2012

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  • Lazaros Zografopoulos · University of Thessaly
    Hello Emanuela,
    I agree that it is logical to consider that after the boom,a burst will follow and this is very important for the sake of the economy's stabilization.Of course keeping the boom going is not a clever strategy and the burst is needed for the drop in prices.
    I think that if the market reacts naturally,in the end the burst will happen,however by artificial means the bubble can be dealt with more successfully.Central bank can help a lot with this problem via its economic policies(such as reducing liquidity,dealing with inflation,not letting investors taking undue risks) and I can't see why this is not beneficial.
    However,I would like to state the fact that many economists think that when a bubble occurs,there is the need to wait for it to burst,before any actions are taken by the goverment.Otherwise,a financial crisis will be caused.So when you say that you would rather promote a strategy, where the price depreciation is seen as a natural consequence of the boom itself,you mean you think its better for actions to be taken after the burst?Or you mean no actions to be taken at all (eg by the goverment) ?
    Moreover,during the bubble people with the overvalued assets feel richer and spend more and when the burst occurs they experience a wealth reduction(the wealth effect).

    best regards,
    L.Zografopoulos
    Jul 22, 2012

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