First it was AOL (NYSE:AOL) and the dot-com bubble. Then it was Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), and the housing bubble. Now we could be looking at a gold bubble. Has the word "bubble" been tossed around so much that it's become meaningless? Economist John Tamny, editor of RealClearMarkets, says yes. But he goes one step further.
"The problem of course is that the notion of a 'bubble' is a logical impossibility," Tamny argues in a Forbes column. "There are two sides to every trade: For every manic speculator buying into 'bubbly' markets with visions of brilliant returns, there's a bearish seller looking to exit that same market." In other words, "since all trades balance, bubbles quite simply don't exist."
Tamny thinks the problem lies less with the markets and more with legislative reaction to markets that get too hot or cold. "Put simply," he says, "neither bull nor bear markets die of old age; instead they die when policy from Washington becomes more or less economically intrusive."
What's your take, Fools? Is the market truly self-correcting? Do we need Washington to step in every once in a while, or do legislators cause the bubbles they decry in the first place? Has the very term "bubble" just become a lazy way of explaining a market swing? Let us know in the comments box below.
