To: Tommaso who wrote (50467 ) 5/25/2004 5:08:18 PM From: Maurice Winn Respond to Tomato, he did not back away from his question about irrational exuberance. Neither was it a notorious speech. It is a famous speech. The speech was fine. Nothing wrong with it. Check it out for yourself.federalreserve.gov Here, you can read it yourself [I know you didn't already] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy. >
