GUATEMALA CITY -- Government officials in China and South Korea are confronted with the troubling prospects of a real estate bubble evident in soaring prices in parts of Shanghai and Seoul. After all, it was the bursting of the asset bubbles in Japan that set the stage for a lost decade of sluggish economic growth in the Japanese economy.
However, selecting appropriate countermeasures requires that an appropriate diagnosis be made. Public policy remedies can be just as ineffective as the prescriptions of doctors that guess wrong about the conditions of their patients.
Although economic theory provides no explanation of psychological urges, there are a few good economic explanations for the existence of speculative bubbles. Unfortunately, many economists and analysts peddle misinterpretations while overlooking the sensible ones.