First, monetary policy was not easy but it was extremely tight by any measure over the last few years. Interest rates and even the amount of base money are not a reliable indicator of monetary policy, especially at the zero lower bound. Only the rate of inflation and nominal GDP growth are measuring the stance of monetary policy.
So where are all those bubbles the critics of monetary easing are pointing their finger at? While it is true that house prices in Germany, for example, have been appreciating significantly in recent years, it is also true that real house prices in Germany have been stagnated for decades. The ECB is not responsible for rapidly appreciating house prices in Berlin, Cologne, Munich. As far as I can tell, credit conditions in Germany are not excessively easy. These cities have seen house price booms because supply is relatively static in the short-run, but demand has been increasing for years.
This phenomenon of increasing agglomeration effects can be observed in most advanced economies and it has for the most part nothing to do with house price bubbles. Large metropolitan areas have been outperforming rural areas as well as small isolated cities for a couple of decades now.This is especially true in the US and can partly explain the Trump phenomenon, but it is also true for other countries like Germany, the UK (see Brexit), and Sweden.
While house prices have performed quite spectacularly in some areas, especially the large urban centers, some people assert that stock prices have reached excessive valuations, even after the correction that has happened over the last two days. While this claim is more easily made for the American stock market, it doesn’t hold up for the European stock markets. The German Dax, for example, is currently at about 11.500 points, only some 3.500 points above where it was before the Great Financial crisis now more than 10 years ago. This corresponds to an increase of about 44%. The annual nominal increase in the German stock market is thus only 3.8%. Using an annual inflation rate of about 1.5%, this corresponds to a real return of just a little over 2% over the last few decades, which is well below the historical average.
European stocks have been trading sideways for several years now, unsurprisingly, since the long-run structural issues of the Eurozone are still unresolved (and the German government shares a large share of the blame). Italy’s debt issues are intertwined with many Southern European banks. There has been no meaningful Eurozone reform for more than a decade now and things are not going to change anytime soon.
If you want to spot any bubbles, don’t look around in European equity markets, which have been performing below par for many years now. Also don’t blame the ECB, which has been carefully withdrawing its stimulus over the last couple of years. And while property prices in the big metropolitan areas are exploding, this seems to be really more a story of fundamentals instead of excessively inflated prices.
Don’t let anybody fool you that bubbles are easy to spot, because they are not. Asset prices mostly behave like a random walk in the short-run, meaning that they are pretty much unpredictable. And even in the medium to long-run, it is really hard to predict where prices are heading, since the exact fundamental value might be hard to establish in the first place. As Keynes once said: Markets can stay irrational much longer than you can stay solvent. Even if you correctly identify an overvalued asset, timing is everything. If you’re too early or too late, you’re just as wrong as everybody else who didn’t see it coming.
PS: The person who predicts that there is no bubble for 19 years in a row, and then in year 20 asset prices pop, usually gets chastised by the media and pretty much everybody, whereas the person who “predicts” a bubble for 19 years and then finally gets a “good” call in year 20 is usually elevated to financial market prophet pretty quickly. Of course, this is extremely problematic since person had 19 good calls while person two had 19 wrong calls. Predicting a bubble year after year, as some financial market commenters have done, is completely useless and it is very unfortunate that these bad calls do not seem to do any reputation harm, which is why so many people get away with these awful predictions in the first place.