Michael R. Sesit, writing in the Wall Street Journal ($), poses the question ”In a World of Bubbles, Which Will Pop Next?”. After reviewing a succession of bubles in paper assets and housing that have been inflating and popping in several countries over the last few years, he writes (sounding very Austrian):
Will the cycle of bubbles forming and bursting with increasing regularity be broken? Not likely, say the experts, because bubbles “are usually a reaction to the previous bubble,” says Robert Buckland, an equity strategist at Citigroup Smith Barney in London. When a bubble bursts, central banks respond to the consequences — recession, bankruptcies, over-indebtedness — by cutting interest rates. “This cheap money then fuels the next bubble, which eventually bursts as the interest-rate cycle turns up,” says Mr. Buckland. “The bursting of this new bubble provokes central bankers to cut rates again, which creates a new bubble.”
Take 1997 and 1998. In one Asian developing country after another, currencies became unhinged and plunged; bond and stock markets fell precipitously. Russia defaulted and effectively devalued. And fearful of the damage to U.S. banks, the Federal Reserve orchestrated a bailout of the overextended Long-Term Capital Management hedge fund. All major central banks reacted by pumping more liquidity into the global financial system, notes Mr. Fels. At first, this money inflated a bond bubble, “which popped viciously in 1999,” he says. “Then, it boosted equity prices further and provided the fuel for the grotesque tech-stock bubble of 1999 and early 2000.”
Faced with an eventual stock-market crash and subsequent recession, the response of the central banks, says Mr. Fels, was lower interest rates. That “helped pump up the bond bubble earlier this year and supported rallies in house prices, equities, corporate debt, commodity prices and emerging markets — you name it.”
