Working Papers

Bubble Wrap

Reactions to my Bubble Poppers monograph, here and here.

posted on 31 March 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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So you found a real estate spruiker and some guy from the Cato Institute to support your idea that bubbles don’t exist?!  Talk about the blind leading the blind.  Here we are, living through the most spectacular bust in 70 years (one, incidentally, you desperately tried to deny through most of 2006-2008) and you still can’t see it?

No wonder Quiggin had the EMH top of his list of “Refuted Economic Doctrines”.  Its so bleeding obvious it hardly needs saying.

I give up.

Posted by .(JavaScript must be enabled to view this email address)  on  03/31  at  09:09 PM

I half agree with you.  I agree that monetary policy should not concern itself with asset bubbles.

Where I demur is about their existence.  On the basis of the data, “bubble economies” and asset bubbles happen.  That current theory cannot give a coherent picture of them does not mean they do not exist.

The way I think of them (based on analysis of bubbles in housing prices) is that circumstances create belief in one-way bets in particular asset markets. (In the housing case, because discretionary control over land use reduces the quantity response to demand, increasing the price response.)  That is, the belief that an asset has value as a net-gainer-of-value over and above its normal use.  So, in a housing bubble, houses become inflation-beating-assets over and above their value as places to live and people become willing to invest in them on that basis.

Once that belief is punctured, they revert to their value in terms of their normal use (e.g. as a source of housing services).  So the bubble bursts.

Posted by Lorenzo  on  04/10  at  04:13 PM

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