Robin, I think that I agree with your definitions and conclusions. I
also think that I can tie your remarks into the  recent thread on the
Austrian Theory of the Trade Cycle.

What you seem to have done in your message is to define a bubble as a
price increase due to speculation, as opposed one based on real
productivity. I do not understand how one could ever objectively
determine in advance whether a bubble is occurring. If not, then all
statements about bubbles in the future would be useful only to someone
who regards herself as a better judge of real productivity than
speculators in "the market." The definition may be helpful in the
description of historical circumstances and thus to economic
historians but not to policy makers whose goal is to moderate the
bubble.

From a policy standpoint, the main issue raised by this definition is
whether it is possible to identify causes of the disconnect to which
you refer. In the case of the housing price bubble, there are numerous
hypotheses. The claim of Sylla, Reinhart and Rogoff seems to be that
no new set of circumstances is involved. We can learn about the
disconnect by studying history. It seems to me that this claim
disregards the changes that have occurred (1) in financial system
technology; (2) in regulations of markets in general; (3) in the
regulation of specific markets, like housing and securities and (4)
other government intervention. This is just a different way of putting
what I have already said. A housing price bubble, for example, might
result from a change in mortgage lending regulations or a change in
the tax code.

Regarding the connection between bubbles and booms in general, the
simple Austrian theory of the trade cycle provides a perfectly
reasonable explanation of such a connection. An increase in the
quantity of money that is totally unexpected must enter the system
somewhere. If it enters through the markets for loans, then the
borrowers begin to push up the prices of assets whose prices depend on
continuing low interest rates. Asset speculators, who do not realize
that all prices, including the interest rates on loans, will soon be
rising, extrapolate the initial price increase in assets into the
future and bid up the prices beyond what productivity dictates.
Bubbles occur in a number of markets. In reality, productivity may not
have risen at all.

These asset bubbles accompany the boom (increase in prices,
production, and employment), which occurs due to factor price
increases lagging behind consumer goods price increases (e.g., a
worker money illusion). Optimistic entrepreneurs receiving windfall
profit extrapolate also, the result being investment that is not
justified by the real productivity of the factors they hire. The
bubble bursts because the money supply is only increased once. The
boom turns into a bust as the entrepreneurs discover their
malinvestments (investment projects whose productivity was
overestimated). Besides extrapolation errors, overestimation is due to
a variety of things that happened in addition to (as a consequence of)
the unexpected increase in money, such as a lengthening of the periods
of production and a change in the composition of demands for consumer
goods.

Continued increases in the quantity of money would delay the
adjustment process but, once they became expected, would ultimately
prompt a "flight to real values" and possibly a breakdown of the
monetary system, making the situation much worse for households.

You can find this kind of explanation in Mises's Human Action,
chapters 17 and 20, although the language will undoubtedly seem
strange.

Pat Gunning
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