Friday, April 30, 2010

Greece, the Latest and Greatest Bubble

by Peter Boone & Simon Johnson

New York Times

March 11, 2010

Bubbles are back as a topic of serious discussion, as they were before the financial crisis. The questions today are: (1) Can you spot bubbles? (2) Can policy makers do anything to deflate them gently? (3) Can anyone make money when bubbles get out of control?

Our answers are: (1) Spotting pure equity bubbles may sometimes be hard, but we can always see unsustainable finances supported by cheap credit. (2) Policy makers will not act because all great (and dangerous) bubbles build their own political support; bubbles are invincible, until they collapse. (3) A few investors can do well by betting against such bubbles, but it’s harder than you might think because you have to get the timing right — and that’s much more about luck than skill.


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