Re: 1929 deja vu

From: Robin Hanson (
Date: Mon Apr 24 2000 - 06:25:40 MDT

Hal Finney wrote:
>Forrest Bishop forwards from
>Two things: first, it's not clear that this is an asset bubble. People
>are trading in these companies in the hope of near-term gains, yes.
>But underlying these hopes, investors see long-term prospects for future
>technology growth. Those companies that are blazing the trail into
>new technologies are the ones which investors hope will be the market
>leaders of tomorrow. Calling it an asset bubble is really a matter of
>second-guessing the market, the collective opinions of all those people
>investing out there. That's not an easy trick to pull off.

Experimental economists have been able to reliably induce asset bubbles
in lab experiments. In such experiments, almost all traders are saying
something like "why are those fools still buying", as they then buy more
themselves. Traders tend to think they can pull out before it falls, and
it takes a fair bit of experience for them to learn otherwise, at which
point assets bubbles no longer happen. Appropriately constructed futures
markets can also make assets bubbles go away even with less experienced

>Second, as far as hard landings: through most of history there has not
>been the understanding that we have today of macroeconomics. Yes, there
>is still much to be learned, and people do not always behave predictably.
>But at the same time we can't deny the effectiveness of the US Federal
>Reserve over the last two decades in moderating the business cycle and
>keeping the economy on a generally even keel.

I think many people do deny this. I'm not sure I share your confidence.

>Stock prices may fall and even crash eventually, but we should not expect
>a 1930s style depression as a result. ... There is still every
>reason to expect significant, possibly unprecedented, economic growth
>over the next few decades, based on technology. Ultimately that can
>support very high valuations.

But there was also significant unprecedented technology growth
in the 1930s.

Robin Hanson
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323

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