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Home Publications Blogs Beat the Press The Fed Really Needs Someone Who Can Think Clearly on Bubbles

The Fed Really Needs Someone Who Can Think Clearly on Bubbles

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Tuesday, 29 October 2013 09:47

That's what Neil Irwin tells us in his column today. Irwin says the Fed is divided:

"There has been a long-simmering battle within the central bank over this basic question: Should they still be focused all-out on fixing the economic damage wrought by the last crisis? Or should they worry more about risks building in the financial system that could contribute to a future crisis?"

The idea that the Fed should be worried about bubbles in the price of platinum or Twiiter stock is just silly. In a market economy people will always be making bets. Some will pay off and some won't. The correct answer at the Fed to the prospect of some people making losing bets is "so what?"

The issue that the Fed should concern itself with is a bubble that actually moves the economy as the stock bubble did in the 1990s and the housing bubble did in the last decade. It wasn't necessary to have complex computer programs and super-sophisticated economic knowledge to see the impact of these bubbles on the economy. Intro econ and third grade arithmetic were pretty much adequate for the job.

In both cases the wealth generated by the bubbles led consumption to soar and savings rates to plummet. In the former case, the ability to sell shares of stock in Garbage.com for billions of dollars led to a boom in investment by nonsense Internet based companies. In the latter case we got a clearly unsustainable construction boom. Both of these booms predictably collapsed when the bubbles burst.

There is no comparable story in the economy today as should be readily apparent to anyone who reads the data. The Fed's hawks are looking to crack down on phantom bubbles and to keep millions of people out of work as the cost of their war.  

 

Addendum:

As some folks have pointed out -- the housing market was getting into worrying ground. My guess is that the interest rate hike spurred by Bernanke's taper talk headed off that bubble. We will know as more data comes in over the next few months.

Comments (11)Add Comment
Shiller P/E at about 24....not sustainable
written by pete, October 29, 2013 11:43
Some signs of bubble in the stock market, if not housing. I.e., back to 2002 (Shiller and Baker already knew there was a bubble) when Krugman joked that maybe we need a housing bubble. Very, very funny. Currently the brakes in the housing market are stricter requirements, which will be whittled away becuase they will be shown to be evidence of racism, as they were in the 90s. This will get the bubble really bubbling.
merciless time, whittling away at pete's brain?
written by david, October 29, 2013 12:40
… becuase they will be shown to be evidence of racism, as they were in the 90s.

pete, it wasn't that simple. Greedy bankers (and third parties) also drove it into the ground. I mean, you do remember Countrywide, don't you?

http://en.wikipedia.org/wiki/M...rimination
The thing to worry about
written by Lord, October 29, 2013 12:45
is whether the economy can growth without a bubble. The greater concern is increasing debt, but as the private sector is deleveraging this is the remotest of concerns.
david, pretty close..
written by pete, October 29, 2013 12:53
You are so right. Fannie and Freddie lobbied hard at lower income disctrict representatives to get them to support relaxed requirements. But of course the gimmick was to use the ruse of racism to hide the greed. James Johnson was an awesome hegemonic.
for example..from teaparty wannabe Ralph Nader...
written by pete, October 29, 2013 1:17
LA Times: "some say" Fed is going to require a bailout
written by Nick Batzdorf, October 29, 2013 1:30
The Bubble This Time
written by Sustainable Gains, October 29, 2013 3:12
I must take exception to this line: "There is no comparable [bubble] story in the economy today as should be readable apparent to anyone who reads the data. "

For those who look, there are many clear signs of credit/housing bubble 2.0:

(1) Extreme levels of student loan debt (and rates of delinquency;

(2) NYSE Margin Debt pushing to new extremes;

(3) Covenant-Lite corporate debt issuance (high risk to lenders) hitting new extremes while interest rates remain abnormally low;

(4) Extremely high proportion of houses being bought by investors paying "cash" (aka pre-funded borrowing) rather than resident owners;

(5) House prices pushing back up toward the bubble peak, while affordability metrics drop;

(6) corporate earnings/GDP well above sustainable levels (at the expense of high trade and government deficits, and low household savings rates;

(7) rising income and wealth inequality since the newly-minted credit is unevenly distributed.

But yes, I agree, the Fed needs folks who can think clearly about bubbles.
Data on student loans and defaults
written by Sustainable Gains, October 29, 2013 3:19
U.S. Dept of Education, Sept. 30 press release:

http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loans

FRED Graph: http://research.stlouisfed.org/fred2/graph/?g=nQY
Data on NYSE Margin Debt
written by Sustainable Gains, October 29, 2013 3:23
...
written by watermelonpunch, October 30, 2013 5:19
As some folks have pointed out -- the housing market was getting into worrying ground. My guess is that the interest rate hike spurred by Bernanke's taper talk headed off that bubble. We will know as more data comes in over the next few months.


But still, there's not really something for me, average citizen, to worry about regarding bubbles in Indonesian government debt or twitter stocks, right?
A bubble bursting that's more or less confined to Iowa farmland isn't going to cause mass unemployment over large portions of New England.
...
written by Peter, November 01, 2013 3:26
I want to dispute the supposedly obvious claim that the construction boom was "clearly unsustainable". Did we run out of materials or construction workers? No. Did we borrow plywood from the future? No. The only thing that made the boom not continue was the problem with *financing*, not construction sector per se. And financing was unsustainable because it was funded with private debt. Less private debt and more public debt (more assets in the hands of the private sector) and the boom could continue forever, giving us full employment and very nice housing stock.

Regards.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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