Thursday, April 8, 2010

Asset Bubbles Speech By William C. Dudley

Yesterday William C. Dudley, President and CEO of The Federal Reserve Bank of New York, gave a speech titled "Asset Bubbles and the Implications for Central Bank Policy."

Although there are many parts of this speech with which I disagree, I found this speech noteworthy and interesting.

I could make exhaustive comments about many parts of this speech. However, for now, I will comment on two aspects:

This speech continues the trend of other Federal Reserve (as well as a general widespread perception) statements that imply that there is an institutional belief at The Federal Reserve that there are no asset price bubbles in existence now, or at least not in the United States. Dudley does say that "I am going to be a bit of a heretic and argue that there is little doubt that asset bubbles exist and that they occur fairly frequently." However, he does not name any that are currently in existence - he just talks of those in the past.

Our societal inability to spot and prevent asset bubbles is problematical. As I have stated before, there are many bubbles in existence now, and they represent a grave danger to our economic system.

Another interesting statement that Dudley makes is the following, which is very noteworthy not only to investors but to others (including policy makers) as well:

"...a bias toward optimism may also play an important role. Studies have found that most people believe that they are above average in terms of their acumen, be it as investors, car drivers or in other activities.5 This overconfidence may cause some people to keep investing in the asset, even when they are skeptical about its valuation because they are overly confident that they will anticipate the end of the bubble and be able to get out in time."

Dudley's speech also references a 2008 speech by Frederic Mishkin of which I may comment upon later.

SPX at 1176.38 as this post is written

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