Must-Read: Leveraged Bubbles: “The critical assumption was that central banks would be in a position to manage the macroeconomic fall-out….:
They could clean-up after the mess. While the aftermath of the dotcom bubble seemed to offer support for this rosy view of central bank capabilities, the 2008 global financial crisis dealt a severe blow to the assumption that the fall-out of asset price bubbles was always and everywhere a manageable phenomenon. This observation meshes well with the key finding of this paper: not all bubbles are created equal…. When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit-boom bubbles is significant and long-lasting. These findings can inform ongoing efforts to devise better guides to macro-financial policies at a time when policymakers are searching for new approaches in the aftermath of the Great Recession.