Gareth Campbell, 23 May 2009

Can financial crises be averted by identifying and dealing with overpriced assets before they cause instability? This column argues that during the British Railway Mania of the 1840s, railway shares were not obviously overpriced, even at the market peak, but prices still fell dramatically. This suggests that extreme asset price reversals can be difficult to forecast and prevent ex ante, and the financial system always needs to be prepared for substantial price declines.

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