"Bubbles? We don't got no stinking bubbles....."

[pscot]

You have to scan down at the link:

http://market-ticker.org/archives/2010/01/11.html

(the Fed's James Bullard) added, “If the asset prices contain reliable information about future inflation and output, then the Fed might respond to the bubble using monetary policy, but the focus would not be on responding to the bubble per se. Another alternative would be to use regulatory, supervisory and lender of last resort powers for financial stability, but financial institutions would need to be capable of withstanding large shocks to asset prices, as well as other shocks.”

Got it? Financial institutions are incapable of surviving asset price deflation. But wait - if asset price increases aren't inflation, then asset price deceases can't be counted as deflation, right?

Isn't that double-standard nasty?

Bullard has inadvertently pulled back the curtain and exposed the reason that we will suffer another crash in the markets, this one worse than the last.

Why worse?

Since the Fed Policy of "easy money, blow asset bubbles" became the mantra (post 1987) each crash that occurred has been worse than the last and has involved greater and greater portions of the economy. This is an inherent mathematical reality when one tries to paper over the insolvencies exposed by an asset price crash through blowing a bigger bubble - to be "successful" you must place more of the economy at risk!

[damntexdem]

1. We got a lot of bubbas in Congress ...

and so we have bubbles.

[bemildred]

2. It's a false-hypothetical.

Asset prices do not "contain reliable information about future inflation and output"; it's sort of a stupid idea when you think about it, mumbo jumbo. Asset prices contain reliable information about what various parties are willing to pay today for stuff, and that is about it.

[pscot]

3. Well, I hpe you're happy now.

I think you just dumped the whole price theory of market behavior in the trash. That could put a lot of highly trained economists out of work.

[bemildred]

4. God will punish me, I'm sure.

The market theory has always been mumbo jumbo, wishful thinking taken for rational thought. Investors do not form a perfect gas, and they never did.