It was about 9 years ago that then-Federal Reserve chairman Alan Greenspan warned investors of "irrational exuberance." Then at issue was the run up of hi-tech stocks. The question is if we are experiencing a similar "irrational exuberance" with regard to the surge in crude oil prices.

I know the arguments that there is too much demand for the available supply, that oil is a finite resource and the world is running out of crude, and that very few new sources of crude have come online in decades. My question is, didn't the market know this 6 months ago? All of the sudden oil traders woke up one morning and realized that we had all these problems?

What I don't understand is that you can't have it both ways. You can't claim that the world has entered a sustained slow growth era, and yet continue to claim that strong demand is what is causing the surging price. If we do still see very strong demand than maybe the global economy isn't as bad as most think.

I am no technical analyst, but the way crude has been trading sure has the makings of a bubble ready to pop. It's one thing to slowly and steadily increase in price, like we have seen for the last 5-6 years. It's quite another to see it move straight up in a vertical line, like we have seen of late.

Investors beware. This sure seems like another example of "irrational exuberance."

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 6/29/08.

Those familiar with former U.S. Federal Reserve Chairman Alan Greenspan's observations about macroeconomics, in general, and the U.S. economy, in specific, will remember his comments regarding "irrational exuberance" -- imprudent buying of stocks; and "the conundrum" -- the tendency for long-term interest rates to remain low, despite Fed increases in short-term interest rates.

Enter a third: the "pale recession."

Greenspan Monday said the U.S. economy has slipped into an "awfully pale recession" and may continue to experience doldrums for the rest of 2008, Bloomberg News reported Monday.

Further, regarding the economy, Greenspan added that "we are clearly receding" and said it was too soon to declare an end to the credit crisis created by the collapse of the subprime mortgage market and housing sector correction, Bloomberg News reported. Greenspan declined to comment on monetary policy.

Robert J. Shiller's Irrational Exuberance is the classic book for understanding the stock market bubble of the late 1990s and early 2000s. His contribution to the study of real estate is equally compelling. The House Price Index used to track our real estate market was co-developed by Mr. Shiller -- and is innovative in that it adjusts for the quality of homes involved in transactions.

So given his expertise in bubbles and real estate, he is probably the guy to listen to when it comes to the topic of the real estate bubble.

In a column in this Sunday's New York Times, Shiller gives an interesting possible explanation for a question that hasn't gotten a lot of attention: Why were Alan Greenspan -- and a lot of other presumably intelligent people -- unable to see that real estate bubble for what it was given that, in retrospect, it seems so obvious?

The answer may lie in a psychological phenomenon known as information cascade. Be sure to read Shiller's column for an explanation of how this may have applied to the real estate market. It's fascinating stuff.

And understanding why the bubble wasn't widely detectable is key to understanding why it happened. As Shiller writes, "The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks."

Irrational Exuberance author Robert Shiller thinks housing is bad (Anyone disagree?) and also thinks that the government isn't doing enough to help people keep their homes: "We have to consider the possibility that the housing price downturn will eventually be as big as that of the last truly big decline, from 1925 to 1933, when prices fell by a total of 30 percent."

Few experts whose opinions are as highly valued as Shiller have suggested such a possibility, and it's worth thinking about the catastrophic consequences that could ensue. On average, homes are only down 5% from their peak -- Shiller is suggesting that we could only be 1/6th of the way through the crisis, in spite of all the hand wringing that has already taken place.

After referring to the broad initiatives that President Roosevelt and others initiated during the Depression, Shiller describes the public policy response to the current crisis as "anemic".

He may be right. But the other side to it is this: The subprime mortgages that are wreaking such havoc enabled a lot of people to acquire homes who had no business owning their own homes. Many had terrible credit, consumer debt, and didn't make substantial down payments. Mortgage fraud was a rampant means of getting homes for lower-income workers, often on the part of mortgage brokers.

Everyone talks about people losing homes like it's this horrible thing -- which it is. But during the housing bubble, homeownership became a reality for millions of people who never would have had that opportunity a few decades ago. An increased foreclosure rate is probably a natural and necessary part of increased homeownership among lower income people, and a broad public policy response may not be appropriate.

Defining periods of irrational exuberance can be difficult. However, one method to do so might simply be to look at the headlines. Here are this morning's:

• Crescent Real Estate Equities to be purchased by Morgan Stanley (NYSE: MS) Real Estate
• Payless ShoeSource (NYSE: PSS) to acquire Stride Rite (NYSE: SRR)
  
• Dow Jones & Co. (NYSE: DJ) controlling shareholders, the Bancroft family, meeting to review News Corp (NYSE: NWS) offer
• Sallie Mae making management changes for its take-private transaction
• Alcan Inc. (NYSE: AL) rejects Alcoa Inc.'s (NYSE: AA) $27 billion offer as inadequate
• MGM Mirage (NYSE: MGM) approach by Kirk Kerkorian's Tracinda Corp requires delicate strategy.

The headlines are not too different from the 1980's LBO boom when virtually every headline was associated with a hostile buyout of some sort. Are we approaching the end of the buyout binge? Most likely not. These periods can last for years.

This buyout boom has been fueled by a number of factors. The most important factor has been undervalued stocks, which, in many cases, still remains. In the post tech-telecom bubble of the 1990s, investors went into a cocoon while U.S. company management continued to grow earnings and increase returns on investment.

What will end this buyout boom? My bet is a massive bull market which pushes valuations off the radar screen of private equity.