Working Papers

When Bubble Poppers Attack

I have an op-ed in today’s Australian, arguing against the view that central banks should explicitly target asset prices:

In 2002, prior to becoming Fed chairman, Bernanke gave a speech titled Asset “Bubbles” and Monetary Policy. Bernanke noted that “the correct interpretation of the 1920s is not the popular one: that the stock market got overvalued, crashed and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy was to slow the economy. The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash”.

The singular cause of the Great Depression of the 1930s, in Bernanke’s view, was that the Federal Reserve fell under “the control of a coterie of bubble poppers”.

Bernanke was merely reaffirming a well-established consensus among economists, ranging all the way from John Maynard Keynes to Milton Friedman. In his A Treatise on Money, Keynes said: “I attribute the slump of 1930 primarily to the deterrent effects on investment of the long period of dear money which preceded the stock market collapse and only secondarily to the collapse itself.” Friedman’s 1963 A Monetary History of the United States also laid blame for the Great Depression squarely at the feet of the Fed and its attempt to become “an arbiter of security speculation or values”.


posted on 12 November 2008 by skirchner in Economics, Financial Markets

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Correct me if I am wrong, but my understanding is that the Fed ran loose monetary policy through most of the 1920s. Then began to tighten the money supply and it was this tightening which caused the stock market crash.

Put another way, if the Fed had not run loose monetary policy earlier, there would not have been a need to tighten later.

Posted by .(JavaScript must be enabled to view this email address)  on  11/12  at  06:43 PM

Yet more comedy from delusional libertarians.

Look mate, you’ve spent the past 2-3 years that I’ve been visiting here telling everyone how resilient the U.S economy is, how we don’t need to worry about the private debt binge, how we don’t need to worry about current account deficits, how we don’t have to worry about asset price bubbles (“consenting adults” you know, and BTW bubbles don’t exist anyway) and how the markets will just solve everything.

Wrong! Wrong! Wrong!

Just how wrong do you have to be before you give up on this nonsense?

Posted by .(JavaScript must be enabled to view this email address)  on  11/13  at  02:31 PM


Some libertarians did not buy the argument that everything was OK. They could see that Greenspan was running very loose monetary policies, and this fed into reckless lending, reckless borrowing and reckless spending.

The market is now trying to correct this through massive deflation.  However, the govt and the Fed are trying to reflate the economy.  Apparently they think this mess can be fixed by more of the same rubbish: reckless lending, reckless borrowing and reckless spending. Bizarro.

Posted by .(JavaScript must be enabled to view this email address)  on  11/13  at  07:03 PM

Agreed, we can’t get out of this by reinflating the credit bubble, and Bush has left the U.S. Treasury in such a perilous state there’s nothing to spend anyway.

So ... here are a few ideas for incoming America Inc CEO, B. Obama:

1. Pull out of Iraq and Afghanistan on day one.  Slash the U.S. military budget by 80-90%.  There’s $400 billion/year saved overnight.

2. Stop throwing money at bankers and start throwing it at low income earners, people who will actually spend the money.  Paulson seems to have twigged on this already.

3. Repeal Bush’s tax cuts for high-income earners.  In this environment it will all be saved anyway.

4. Transparency, transparency, transparency.  Drag all these CDOs, CDSs, hedge funds etc into the bright light of day and force them to disclose the inner workings of their “financial engineering”.

Oh BTW, Krugman says the New Deal didn’t work not because FDR spent too much, but because he spent too little:
Franklin Delano Obama

One last comment:  Is an 862 point turnaround in 4 hours indicative of “consenting adults” conducting sane and rational transactions, or an out-of-control casino?

Posted by .(JavaScript must be enabled to view this email address)  on  11/14  at  11:06 AM

1. Agree.
2. Agree about the bankers.  Disagree about low income earners.
3. Disagree. Saving is a good thing.
4. Agree. However, you would probably need a PhD to understand them.
5. FDR did lots of other stuff to prolong the depression, including increase taxes. (Hoover was just as bad).
6. Actually, worse than a casino. At least in a casino you have fixed odds.

Posted by .(JavaScript must be enabled to view this email address)  on  11/14  at  07:40 PM

Time for some revision…

Dr Kirchner on 30 April 2008:
The US Recession that Isn’t

The Philadelphia Fed on 17 November 2008:
Forecasters:// U.S. in 14 month recession

It said the U.S. economy entered a recession in April [2008] and that it will last 14 months, which would make it one of the longest recessions since the Great Depression of the 1930s.


On that basis you lose your point from April and the score is now Stiglitz 2, Kirchner 0.

Posted by .(JavaScript must be enabled to view this email address)  on  11/18  at  08:23 AM

This is the best video I’ve seen all year: Peter Schiff Was Right

Give the man a cigar!

Posted by .(JavaScript must be enabled to view this email address)  on  11/18  at  05:41 PM

The Intrade contract I was refering to on 30 April was of course entirely correct in relation to Q1 and Q2.  Current pricing on Q3 and Q4 may also turn out to correct, even if different from what was being priced in April!

Posted by skirchner  on  11/20  at  01:06 PM

Stephen, you’re delusional.

I have seen some very scary numbers for the fourth quarter, I know the consensus is about minus three, but I’ve heard numbers that are almost double that

- Steve Liesman, Senior Economics Reporter CNBC…

Watch here from 6:45.

Minus six percent in Q4.  That’s depression numbers.

Posted by .(JavaScript must be enabled to view this email address)  on  11/20  at  01:10 PM

That’s what Intrade is now pricing.  I wouldn’t disagree based on the latest data. 

Remember also that the US GDP data are reported at annualised rates.

Posted by skirchner  on  11/20  at  03:09 PM

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