Asset bubbles come and go. Each begins with a story: Japan as No. 1, the East Asian miracle, dotcom mania, how financial innovations eliminate risk – just to mention the latest four. Each begins with a plausibly bullish story, which is then magnified by the financialmarkets, creating the inevitable bubble.

Back in the 1980s, Japan produced world-conquering, seemingly invincible companies like Sony and Toyota. Their competitive gains justified the re-rating of Japan’s asset prices. The issue was by how much? This is where imagination ran riot. Next came the East Asian miracle – a story of gross domestic product. The “Asian Tiger” economies generated high GDP growth rates even while the US economy was depressed. Financial markets caught on to that, extrapolated the trend ad infinitum, and re-priced their assets accordingly.

At the end of the 1990s, the dotcom phenomenon conjured up the possibility of making unlimited amounts of money in a new economy. Financial markets ignored the role of competition in limiting profitability, while irrational exuberance led to overinvestment and the collapse of profitability. More recently, financial innovations were peddled with a tale of decreased risk through financial engineering, and that lower risks would lead to the re-rating of risk assets like property or stock. It turned out that this, too, was just a story. Decreasing risk was a mathematical illusion. As more and more people believed the story, prices of risky assets moved higher, which validated the expectation of lower risk – for the time being.