Economic Review

3/24/09

Yes Virginia… there appears to be yet another bubble.

Just when you thought the lessons had been learned regarding the reliance of bubbles to generate positive economic growth, along came the process of bailouts. Given the extreme economic fallout the US is currently experiencing, which is largely attributed to the creation of bubbles in Equities back in the late 1990s and real estate in the new millennium, perhaps they should be avoided. The problem with the creation and reliance on these bubbles is that at some point the free market system takes control and deflates them, where the negative economic ramifications are usually dire.

Last week the Federal Reserve announced that it would support the US Treasury market by purchasing Treasury securities and this week plans are to create a market to alleviate the problems with toxic asset valuations. These programs along with previous massive injections of liquidity into the system have involved the creation of vast amounts of currency. So where is the next bubble?….it may be in that dollar bill in your pocket.

On a positive note, because the US financial system has been so stable in the past, policy makers at least have the option of utilizing excessive liquidity creation mechanisms to help stabilize extreme disequilibriums that may exist….and do exist now. The argument remains however, should the free market forces be left alone to establish supply and demand balances over the long run or should aggressive proactive policies be implemented to avoid serious short term economic pain.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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