To Prick or Not?
As I was pushing this thread on anyone and everyone, a friend raised what is an important question: What should we do about bubbles while they are happening?
Are we to conclude from your book that since bubbles are great for the economy we shouldn’t worry about pricking them? I assume you don’t think we should try to produce bubbles, but maybe it's worth spelling that out. If they are great, why not?
This is, of course, a debate that my favorite whipping boy, Alan Greenspan, has weighed in on. He has argued that it’s impossible to definitively identify a bubble while it is happening. So the best we can do is to act quickly after it has popped, he has said.
Should the government, assorted regulators, and/or the Federal Reserve take steps to curtail bubbles? Which is worse: Allowing bubbles to happen or trying to stop them?
the most obvious bubble right now is the DOW. It's valued far out of proportion to earnings. What would you suggest we do about that?
May 16, 2007 4:02 PM | Reply | Permalink
Strikes me that the most visible bubble at the moment is in the TPM Café Book Club. At time of posting this 10 out of 21 stories on the front page are related directly or indirectly to Pop!. I suppose this may have happened before, but I can't remember it.
In the meantime, none or the reader blogs are featured. Isn't there a more efficient way to handle something like this?
aMike
Nothing to do with Jesse Eisinger's comments, with which I agree. I just don't know how else to reflect my general opinion about the discussion so I put it here. Sorry, Jesse.
May 16, 2007 5:41 PM | Reply | Permalink
Could you spell out what the steps to curtail bubbles would involve? I'm guessing that it'd mean contraction of the money supply when there's "irrational exuberance." Would that soften the landing or accelerate it? I'd be interested in your opinion.
John
http://www.haberarts.com/
May 16, 2007 6:25 PM | Reply | Permalink
Milton Friedman talked about "dropping money" from a helicopter to end deflation so bubbles are probably a good way to do this.
Sort of like flooding the grand canyon, for example, to revive the ecosystem.
To boldly go...
May 16, 2007 8:20 PM | Reply | Permalink
Note that the second does not follow from the first. If we can take an action that will restrain a speculative asset price inflation, because it generally tends to restrain speculative asset price inflations, as opposed to requiring a forensic understanding of the driving forces for the bubble and taking precisely the action tailored to that specific bubble, then it may well be possible to reduce the magnitude of the bubble, and hence reduce the damage done when it bursts.
An example would be requiring fair market values for the use of assets as collateral to be the lesser of the current market value and the moving average of the fair market value over the past five years of its life. Since the borrowing power available to owners of assets experiencing an asset price inflation bubble is one of the factors that can help inflate a bubble, a more conservative market value could well help slow down the pace of the inflation.
May 16, 2007 8:22 PM | Reply | Permalink