Editing Economic bubble (section)

===Liquidity===
[[Asset price inflation|One possible cause of bubbles]] is excessive monetary liquidity in the financial system, inducing lax or inappropriate standards of lending by the [[bank]]s, which makes markets vulnerable to volatile asset price inflation caused by short-term, leveraged speculation.<ref name="Buchanan2008">{{cite news |first=Mark |last=Buchanan |title=Why economic theory is out of whack |work=New Scientist |date=19 July 2008 |access-date=15 December 2008 |url=http://forum.globalhousepricecrash.com/index.php?act=attach&type=post&id=4127 |url-status=dead |archive-url=https://web.archive.org/web/20081219004510/http://forum.globalhousepricecrash.com/index.php?act=attach&type=post&id=4127 |archive-date=19 December 2008}}</ref> For example, [[Axel A. Weber]], the former president of the [[Deutsche Bundesbank]], has argued that "The past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset-price bubbles."<ref>{{Cite book|url=https://books.google.com/books?id=snyQDAAAQBAJ&q=%22The+past+has+shown+that+an+overly+generous+provision+of+liquidity+in+global+financial+markets+in+connection+with+a+very+low+level+of+interest+rates+promotes+the+formation+of+asset-price+bubbles.%22&pg=PA33|title=Bubbles and Contagion in Financial Markets, Volume 1: An Integrative View|last=Porras|first=E.|date=2016|publisher=Springer|isbn=978-1137358769|language=en}}</ref>

According to the explanation, excessive monetary liquidity (easy credit, large disposable incomes) potentially occurs while fractional reserve banks are implementing expansionary monetary policy (i.e. lowering of interest rates and flushing the financial system with money supply); this explanation may differ in certain details according to economic philosophy. Those who believe the money supply is controlled [[exogenous variable|exogenously]] by a central bank may attribute an 'expansionary monetary policy' to that bank and (should one exist) a governing body or institution; others who believe that the money supply is created endogenously by the banking sector may attribute such a 'policy' to the behavior of the financial sector itself, and view the state as a passive or reactive factor. This may determine how central or relatively minor/inconsequential policies like [[fractional reserve banking]] and the central bank's efforts to raise or lower short-term interest rates are to one's view on the creation, inflation and ultimate implosion of an economic bubble. Explanations focusing on interest rates tend to take on a common form, however: when interest rates are set excessively low (regardless of the mechanism by which that is accomplished) investors tend to avoid putting their capital into savings accounts. Instead, investors tend to leverage their capital by borrowing from banks and invest the leveraged capital in financial assets such as [[stock]]s and [[real estate]]. Risky leveraged behavior like speculation and [[Ponzi scheme]]s can lead to an increasingly fragile economy, and may also be part of what pushes asset prices artificially upward until the bubble pops.

{{quote box|width=300px|quote=But these [ongoing economic crises] aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities.|source=[[Paul Krugman]]<ref>{{cite web |author=Krugman, Paul |date=24 August 2015 |title=A Movable Glut|url=https://www.nytimes.com/2015/08/24/opinion/a-moveable-glut.html?action=click&pgtype=Homepage&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region |access-date= 24 August 2015|work=[[The New York Times]]}}</ref>}}

Economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level. Once the bubble bursts, the fall in prices causes the collapse of unsustainable investment schemes (especially speculative and/or Ponzi investments, but not exclusively so), which leads to a crisis of consumer (and investor) confidence that may result in a financial panic and/or financial crisis. If there is a monetary authority like a central bank, it may take measures to soak up the liquidity in the financial system in an attempt to prevent a collapse of its currency. This may involve actions like bailouts of the financial system, but also others that reverse the trend of monetary accommodation, commonly termed forms of 'contractionary monetary policy'.

These measures may include raising interest rates, which tends to make investors become more risk averse and thus avoid leveraged capital because the costs of borrowing may become too expensive. There may also be countermeasures taken pre-emptively during periods of strong economic growth, such as increasing capital reserve requirements and implementing regulation that checks and/or prevents processes leading to over-expansion and excessive leveraging of debt. Ideally, such countermeasures lessen the impact of a downturn by strengthening financial institutions while the economy is strong.

Advocates of perspectives stressing the role of credit money in an economy often refer to (such) bubbles as "credit bubbles", and look at such measures of [[financial leverage]] as [[debt-to-GDP ratio]]s to identify bubbles. Typically the collapse of any economic bubble results in an economic contraction termed (if less severe) a recession or (if more severe) a depression; what economic policies to follow in reaction to such a contraction is a hotly debated perennial topic of political economy.