Wednesday, 18 November 2009

"Fundamental value" as an antidote to bubble policy - not likely any time soon

I particularly like this from today's Lex column in the FT.

Finally a central banker has admitted he is as clueless as everyone else. “It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” said the Federal Reserve chairman in a speech on Monday. Ben Bernanke then contradicted himself, however, by adding: “It’s not obvious to me in any case that there’s any large misalignments currently in the US financial system.” Given the first statement, how can he know?

One can either give up on the notion of trying to pin down what "fundamental value" really is, and how it can be measured, in which case boom/bust is here to stay or financial technocrats are going to have to think a little bit more - to justify their ample rewards - to arrive at a basis for quantifying asset inflation and anticipating bubbles.

Chairman Bernanke seems not to be up to the second challenge.

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