Number: RL33666
Title: Asset Bubbles: Economic Effects and Policy Options for the Federal Reserve
Authors: Marc Labonte, Government and Finance Division 
Abstract: After several years of steady growth, equity (stock) market prices began to rise rapidly in 1995. From the beginning of 1995 to its peak in August 2000, the value of the Standard and Poor's index of the 500 largest firms had more than tripled in nominal terms (see Figure 1). The sharpest increases in equity prices were concentrated in high-tech stocks. Prices on the NASDAQ, an exchange known for listing smaller high-tech firms, were six times higher at the peak than in 1995. During this period, extravagant claims were made about a "new economy" that defied the old economic laws, and about the easy, sure-fire way to make money through equity investments. At the same time, many economists cautioned that the stock market was in the grips of a speculative bubble, an increase in prices unrelated to fundamental determinants of value, that would eventually burst and impoverish many of the same investors that it had hitherto made rich. Alan Greenspan, then-Chairman of the Federal Reserve, cautioned against "irrational exuberance" in the equity market in 1996, and Yale economist Robert Shiller released a widely read book of the same title in 2000.
Pages: 22
Date: September 25, 2007