One of the most dangerous phenomena (in an economic sense) is an asset price "bubble." Asset prices are bid up to unreasonable levels based largely on an optimistic view that the rise will continue. The world has seen the effects of stock market bubbles, real-estate bubbles, and commodity bubbles. The problem with asset price bubbles is that when they burst it can be devastating for an economy. Consumers and businesses make financial decisions based on the position of their balance sheet (actual or implicit). An over-inflated asset side of the balance sheet can result in the taking on of an excessive level of debt. When the bubble bursts many households and businesses become technically insolvent. Those that do not must cease much purchasing activity until the balance sheet can be repaired. Consequently the effects of a bubble burst are most often devastating to the well being of an economy. Recent widely discussed bubble bursts include financial markets and real estate markets.
Carefully reread the first three paragraphs of Chapter. Described is one of the best-known bubble bursts in U.S. economic history. Remember, many analysts of the time were predicting that mass production has changed the fundamentals of the market. The old measures of proper market valuation were obsolete and the market had the potential to climb to even greater heights in this "new economy."
What I want you to consider is whether the U.S. has ever experienced a stock market bubble? Are we headed for more prosperous times in 2010 or are we headed for another painful recession (based on the economic definition of a recession)?