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.