What are speculative bubbles and how can we combat them?
“The difference between the market price and the intrinsic value is what we call the ‘bubble component’ or the ‘speculative bubble’ in a given asset, whether it’s a financial or a real estate asset.”
“One might well ask why anyone would want to pay a price for an asset that’s higher than its intrinsic value. The answer is that people, investors, are willing to pay this higher price to the extent that they believe it will be possible to resell the asset at an even higher price in the future. This is what economists call a "rational speculative bubble", because a rational investor may be willing to buy, or to pay a price that includes a significant bubble component, even though the bubble in question is bound to burst sooner or later.”
“So how can we combat bubbles? This is a very complex issue. The first step is to place restrictions on credit, the credit to finance purchasing of the assets whose price includes a bubble component. [...]Even if we can’t guarantee that a bubble won’t develop and grow, by placing restrictions on credit when these situations arise we can at least avoid excessive growth of the financial sector and the resulting knock-on effect on the real economy.”