Moreover, I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers’ attitudes than to the economic fundamentals that by rights should determine the allocation of capital.
If we nevertheless persist in trying to measure bubbles, what indicators might be useful? Several have been suggested, including the rate of appreciation of asset prices, various ratios that attempt to measure the return on stocks, and growth in bank credit. None of these provides a reliable indicator of a developing bubble.