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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: NOW who wrote (21200)	1/12/2005 8:09:12 PM
From: RealMuLan	Read Replies (2) \| Respond to of 116555

-ggg, I see. >>but are not markets said to be advanced indicators?<< Not sure it will be the same in China. The more likely reason for the lousy stock market in China is corruption- and lack of regulation-related. But I might be wrong<g> I read that plenty of Chinese already so disappointed that they completely quit now.

To: NOW who wrote (21200)	1/12/2005 11:32:26 PM
From: mishedlo	Read Replies (3) \| Respond to of 116555

bubbles hard to spot even in hindsight Remarks by Vice Chairman Roger W. Ferguson, Jr. At the Stanford Institute for Economic Policy Research, Stanford, California January 12, 2005 Recessions and Recoveries Associated with Asset-Price Movements: What Do We Know? Unfortunately, detection of a bubble, which is problematic even ex-post, is an even more formidable task and arguably becomes virtually impossible in real time. Indeed, in real time, it is not uncommon for economists and market participants to fail to recognize important shifts in underlying trends that may subsequently be viewed as the source of significant changes in market fundamentals. Current statistical methods are simply not up to the task of "detecting" asset-price bubbles, especially not in real time, when it matters most. "Detecting" a bubble appears to require judgment based on scant evidence. It entails asserting knowledge of the fundamental value of the assets in question. Unsurprisingly, central bankers are not comfortable making such a judgment call. Inevitably, a central bank claiming to detect a bubble would be asked to explain why it was willing to trust its own judgment over that of investors with perhaps many billions of dollars on the line. ...... Why was the 2001 recession relatively short and shallow even though the preceding swing in asset prices was so severe? In my opinion, two reasons stand out. The first regards the health of the financial sector. During the 1980s and early 1990s, the U.S. banking sector faced a succession of challenges: the savings and loan crisis of the early 1980s, the international debt crisis of the mid-1980s, waves of bank failures and consolidation, and the need to build capital in response to the adoption of the Basel I standards in 1988. But by the mid-1990s the banking sector had regained a solid footing, and regulators were careful to keep it that way. Prudential regulation coupled with good risk management meant that financial firms limited their exposure to risk during the boom years of the late 1990s. This approach paid off handsomely when the asset-price break occurred. Despite the recession, banks remained well capitalized, and their strength eliminated the threat of a vicious credit crunch or the risk of fragility in the system. The second, and perhaps equally important, reason that the recent U.S. episode was unusually benign was, in my view, the quick response of policy. Both fiscal and monetary policy were eased quickly and effectively in this episode. The Federal Reserve cut the federal funds rate rapidly to create monetary accommodation and maintained conditions of substantial monetary policy ease for a considerable period well into the expansion. As well, the Administration and the Congress took quick steps early in the recession to provide fiscal stimulus that helped to prop up aggregate demand. A clear lesson emerges from this experience for policy over the long haul. By pursuing fiscal prudence and price stability during booms, policymakers greatly enhance their ability to take swift, effective countercyclical action when it is needed most. [gag me with a spoon - mish] Conclusions In closing, let me reiterate some of the key points and lessons I draw from this review. First, as already understood, detecting asset-price overvaluations and undervaluations is controversial in hindsight and arguably impossible in real time. As a result, although asset-price booms and busts are often linked to recessions, a clear-cut policy response to suspected waves of exuberance cannot be suggested. Second, sweeping generalizations regarding asset-price-bust recessions and subsequent recoveries are not easily made. Idiosyncrasies dominate comparisons in the historical data. As such, each recession-and-recovery episode would seem to call for its own tailor-made policy response. Third, to the extent that comparisons across recessions are informative, asset-price-bust recessions do not appear to be necessarily more costly than other recession episodes. Specifically, at a macroeconomic level, recessions that follow swings in asset prices are not necessarily longer, deeper, and associated with a greater fall in output and investment than other recessions. ============================================================ lots more here complete with charts and graphs federalreserve.gov