THIS newspaper has a history of fretting about financial bubbles, and has frequently criticised central bankers for inflating them. In 1998 we urged Alan Greenspan, then chairman of America’s Federal Reserve, to raise interest rates to dampen a stockmarket bubble. In 2003, four years before the financial crisis, we became worried about a housing bubble, and again urged central bankers to tighten monetary policy. Given this record, you might expect The Economist to be urging tighter policy today. For all manner of asset prices have been soaring, and some are reaching territory that is hard to justify with economic fundamentals (see article).

The S&P 500 share index is up nearly 30% this year, even as America’s recovery has been lacklustre. Measured against an historic average of profits, its price-earnings ratio, at 25, is well above its historical norm (around 16.5). Ordinary folk are not yet piling into shares, but sophisticated investors are once again using big dollops of debt to spice up returns.

As before, central bankers are fuelling the asset-price surge. Having cut short-term interest rates to zero, they are trying to bolster enfeebled economies with unconventional tools such as “quantitative easing” (printing money to buy bonds) and by promising to keep rates low for a long time. The largesse is unprecedented, and is lasting longer than anyone expected.

But this time it is the right thing to do. Higher rates would fell the rich world’s still-enfeebled economies and risk a dangerous deflation. Instead of tightening, policymakers should work harder to ensure that cheap money translates into new investment rather than higher prices for existing assets.

Bubble-wrapped

All monetary loosening bolsters an economy, in part, by raising asset prices. Lower interest rates mean a firm’s future profits are worth more today; property prices rise as homebuyers can take on bigger mortgages. Higher valuations, in turn, should spur firms to invest more; rising house prices should encourage more construction; and greater wealth should lead people to spend more. The surprise today is that monetary loosening, particularly bond-buying, has had a big impact on asset prices, but much less effect on spending and investment.

No one is quite sure why. One explanation is that the hangover from the financial crisis still lingers, leaving firms and households keener to cut debt than boost spending. Another is austerity. Big budget cuts have slowed economies and left firms uncertain about future demand for their products. As the investment weakness drags on, some fear it may be a permanent feature of modern economies. Larry Summers, a former American treasury secretary, argues that the rich world may now be in “secular stagnation”, in which the appetite to invest is persistently below people’s desire to save (see article).

These explanations have different long-term implications. Hangovers eventually lift, whereas “secular stagnation” suggests a permanent lid on growth. But in the short term they all call for a similar response: a three-pronged attack to boost investment. First, central bankers should tweak their unconventional tools to favour investment in new assets over the purchase of existing ones. The Bank of England’s recent decision to focus its “funding for lending” support on new business loans rather than home mortgages was sensible. Second, politicians should slash the red tape and tax distortions that dampen the desire of firms to invest. Britain could boost construction and ease the pressure on house prices by loosening planning rules. In America, tax reform could encourage firms to bring back, and invest, profits stashed abroad.

Third, and most important, governments should boost public investment. From bridges to broadband, many rich countries need an upgrade. Britain’s public transport is overloaded. More than 40% of London’s water pipes are a century old. One in seven German bridges could be in dangerous disrepair. Yet austerity has led capital budgets to be slashed. Britain’s infrastructure plan, unveiled this week, is a start, but it does not involve enough new public investment.

Public investment is not a panacea: Japan’s government paved over half the country in failed bids to thwart stagnation with stimulus. But what better time to invest in urgently needed infrastructure than when the cost of borrowing is at record lows? Greater public investment will boost economic potential in the long term and bolster spending in the short term. It should be at the top of today’s bubble-prevention arsenal.