Understanding the source of these developments as asset supply shortages
informs optimal policy responses. The policy prescriptions that follow
from this view are a mixture of conventional advice, with an emphasis on fi-
nancial development and incentive preservation in capital markets, and more
adventurous recommendations. In particular, since speculative bubbles are
a necessary evil in this environment, it is important to learn to manage
their risks rather than to obsess over choking them. By extension, the same
recommendations apply to concerns about global imbalances and over the
excess-liquidity consequences of low interest rate policies.