There are some frightening echoes. For one thing, there is the unworldly presumption that those who sound a warning about bubbles must prove their case conclusively. For example, the cyclically adjusted price/earnings ratio developed by the economists John Campbell and Robert Shiller, screams that the US stock market is now as overvalued as it was in 2007. But of course you can pick at this measure: perhaps accounting changes have distorted the comparison? It is never possible to know with certainty that a bubble exists. Yet the 2008 crisis shows that it might be sensible to act, even without certainty.
Central banks face an excruciating dilemma. Low growth and low inflation call for stimulus; markets untethered from fundamental value make stimulus seem dangerous; the right judgment will vary from country to country. As they weigh these choices, central bankers must remember a basic lesson from history. It is always easy and tempting to find reasons not to act against bubbles. But financial stability matters at least as much as price stability. In today’s distorted markets, savers are paying borrowers for the privilege of lending, pension and insurance funds can’t earn the returns they need, and banks struggle to earn profits. All of which may threaten growth as much as very low inflation.
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