[...]... either a collapse in house prices and a new recession, or alternatively a return to high inflation The first part of the book looks at how bubbles emerge and the effects they have on the economy, both as they inflate and when they I Bubbles and How to Survive Them collapse The 1920s stock market bubble, very similar in many ways to the 1990s experience, is analyzed to see how and why we avoided disaster this... bubble For example, in the late 1990s The Economist and the Financial Times regularly returned to the bubble theme in US stocks In recent years they have been justifiably pleased with themselves, although too polite to gloat And they have turned their attention to warning about housing bubbles 17 Bubbles and How to Survive Them MAJOR RISE IN LENDING Typically bubbles also involve a significant rise in lending... Japanese economic model, with all its panoply of “just-in-time” inventory management, worker involvement, and “total quality control,” was going to dominate the world Current housing bubbles in the UK and Australia are often linked to increased immigration 15 Bubbles and How to Survive Them PARADIGM SHIFT There is often the perception of a “paradigm shift” and this is usually argued energetically by some... to argue at some length why contemporary commentators, who argued that the world had changed and bubbles had become less likely, would M 1 Bubbles and How to Survive Them be proved wrong.2 He was writing in a period when the world had been relatively free of major manias and crashes for a while Now, with the collapse of the 1990s stock market bubble still reverberating and amid signs that housing bubbles. .. potential for serious problems is considerable 5 Bubbles and How to Survive Them WHY BUBBLES MATTER When any bubble goes bust, some people lose Experienced speculators can be caught out, though they sometimes recognize the end of a bubble and cut their positions in time Most importantly, they usually know how to limit their risk to a bearable level The investors who really suffer are those who are drawn... ways to prevent bubbles inflating? Are there clear warning signs, from valuations or other factors? Should we look for ways to restrain bank lending when prices become too much out of line? And how can investors protect themselves? 6 Introduction: Why Bubbles Matter These are the issues that will be discussed in Part III of this book First, we need to take a look at the origins and effects of previous bubbles. .. brings more investment, more competition, and, eventually, lower 16 An Anatomy of Bubbles prices so that the gains flow through to increased real incomes Profits fall back to normal levels because in a market economy companies cannot hold onto them in the long run NEW INVESTORS AND ENTREPRENEURS Returning to the checklist, a regular feature of bubbles is that new investors are typically drawn in, people who... experience of how to manage risks For a bubble to continue to inflate it needs more and more people to invest, risking more and more money The end of the bubble occurs either because there is nobody left to be drawn in, or because some event makes people start to sell If bubbles affected only a few investors, with little impact on the overall economy, they would be of limited importance Some bubbles are... fostered by technology and growth stocks In the late 1990s US policy makers, led by Federal Reserve Chairman Alan Greenspan, sat back and watched as the US stock market went into a bubble strikingly similar to the 1920s experience They argued that it was not necessarily a bubble and that, even if it were, it would be dangerous to deflate and much better to wait and be ready to deal with any bust after the... of bubbles and busts in the world’s stock and property markets have become the main focus for both investors and policy makers, overshadowing the much milder fluctuations in ordinary consumer price inflation Many investors lost heavily in the collapse of the 1990s stock bubble, but now many people are betting on continually rising house prices Meanwhile, policy makers seem to have no way to restrain bubbles; . placed the emphasis on intelligent policy making to deal with crises. As a practicing economist and strate- Bubbles and How to Survive Them xii Bubbles Prelims 6/8/04 7:55 PM Page xii gist in. ultimately to the Second World War. The worst episode in recent times has been in Japan following the collapse of its stock and property bubbles. From the peak in 1991, land Bubbles and How to Survive. ii BUBBLES AND HOW TO SURVIVE THEM Bubbles Prelims 6/8/04 7:55 PM Page iii The data, facts and examples used in this text are believed to be correct at the time of publication but their accuracy and