11 APRIL 1998, Page 26

Soap gets in your eyes

THE catch question now — the $64 ques- tion, as we used to call it when dollars bought more — is whether the American market and reality have parted company. The doubters say that an excess of money and credit has got into asset prices and inflated them. Watching from Lombard Street, Tim Congdon notes that in America, the market and the money supply took off together. What he now sees is an asset price bubble, blown up by America's banks, which, as banks do when they have money to spare, are looking for new ways to lose it. Watching from Wall Street, James Grant reminds us of the old investment maxim: don't confuse brains with a bull market. In the same way (so he says in his Interest Rate Monitor) we should not confuse a new eco- nomic era with one of history's greatest credit bubbles. Nor should we believe that the sage of the Fed has abolished the cycle: `Fundamentally, what causes busts is booms.' All I would add is that no way has ever been found of letting a bubble down gently. Soap gets in your eyes.