Digg it
Bookmark it
Stumble it
Columbia University Professor and former Federal Reserve official Frederic Mishkin wrote a much-discussed Op-Ed in the Financial Times yesterday. In it, he asks
Are potential asset-price bubbles always dangerous?
He answers this question with a no, noting that some asset bubbles are more dangerous than others because of their connection to debt and credit. I agree with his delineation and assertion that some asset bubbles are more dangerous than others. But, his conclusion that the non-credit variety of asset bubble — what he calls the "pure irrational exuberance bubble" — is not dangerous is false. This is the same blinkered thinking which led to Nasdaq 5000 and its crash. Experience demonstrates that all asset bubbles are dangerous, some asset bubbles are more dangerous than others. Think Animal Farm: All bubbles are equal, but some bubbles are more equal than others.
The real question Mishkin attempts to answer is whether the Federal Reserve (where he once worked) or any other central bank should target asset prices so as to prevent bubbles from taking form.
Because the second category of bubble does not present the same dangers to the economy as a credit boom bubble, the case for tightening monetary policy to restrain a pure irrational exuberance bubble is much weaker. Asset-price bubbles of this type are hard to identify: after the fact is easy, but beforehand is not. (If policymakers were that smart, why aren't they rich?) Tightening monetary policy to restrain a bubble that does not materialise will lead to much weaker economic growth than is warranted. Monetary policymakers, just like doctors, need to take a Hippocratic Oath to "do no harm".
Are we to take this seriously? Even Alan Greenspan is showing more realism in the wake of our latest bubble. This man is outright dangerous. Don't be fooled; his piece is a plant. We have some serious asset bubbles forming right now and he is looking to give intellectual cover to the watch-the-bubble-and-clean-up-after-the-mess policy we saw on display in the late 1990s. Yves Smith thinks there is a connection between his statement and likely Federal Reserve policy.
What I find interesting is how the Federal Reserve under Greenspan had an explicit policy of targeting asset prices as a means of reflating the economy. Yet, Mishkin is saying they should not target asset prices as a means of deflating the economy. This is what is called monetary policy asymmetry, otherwise known as the Greenspan Put. It's not about targeting asset prices but looking for excess credit growth, which was certainly on display in the Nasdaq boom as well.
In effect, Mishkin is arguing for us to continue with business as usual. This is one of the more loathsome pieces of prattle I have witnessed since the financial crisis began. I hope no one takes this man seriously. I am ashamed that he is a professor at the business school I attended.
I would be remiss if I didn't point out his equally absurd piece of research on Iceland's economy before it collapsed. he wrote a piece called "Financial Stability in Iceland" with Tryggvi Herbertsson which stated:
Our analysis indicates that the sources of financial instability that triggered financial crises in emerging market countries in recent years are just not present in Iceland, so that comparisons of Iceland with emerging market countries are misguided.
No, Mr. Mishkin your analysis is misguided. It was with Iceland and it is here again. See below for a real analysis on Iceland from Willem Buiter and Anne Sibert which we can take seriously.
As I have been saying, you can get wildly different conclusions from two people based on the same facts and largely the same analysis. It goes to philosophical predisposition. What this FT article by Mishkin demonstrates is that no amount of real world evidence of the havoc that bubbles wreak will dissuade these ivory tower ideologues from supporting failed economic policy.
Sources
Not all bubbles present a risk to the economy "“ Frederic Mishkin, FT
Financial Stability in Iceland (pdf) "“ Icelandic Chamber of Commerce
The collapse of Iceland's banks: the predictable end of a non-viable business model "“ VoxEU
Central Banks Can Do Better Than Just Mopping Up "“ Caroline Baum, Bloomberg
Related posts:Popping bubblesFederal Reserve’s Fisher says tightening will be aggressiveJapan’s easy money policy was the trigger for the tech wreckQuote of the day: William White and inflationBank leverage: forever blowing bubbles part two
Category: Economics Tags: federal reserve, financial bubbles, Iceland, monetary policy« News from around the web: 2009-11-09 « » Links: 2009-11-10 » carmelocortes nothing has changed , all central bankers are incompetent. Bubbles (housing, nasdaq) are autoregulated , sooner or later pop up by themselves. The actual problem is that this new bubble o reflation is really fostered by central banks intentionally on the grounds that economy only needs time to accommodate itself as they consider this a circumstantial and not an structural problem. In the mean time savers as usual are harmed by keeping low artificial interest rates. This kind of bubble will explode once government bonds yields start increasing and ratings downgrading. blog comments powered by Disqus var disqus_url = 'http://www.creditwritedowns.com/2009/11/all-bubbles-are-equal-but-some-bubbles-are-more-equal-than-others.html '; var disqus_container_id = 'disqus_thread'; var facebookXdReceiverPath = 'http://www.creditwritedowns.com/wp-content/plugins/disqus-comment-system/xd_receiver.htm'; var DsqLocal = { 'trackbacks': [ ], 'trackback_url': 'http://www.creditwritedowns.com/2009/11/all-bubbles-are-equal-but-some-bubbles-are-more-equal-than-others.html/trackback' }; Subscribe Social Media Readers who viewed this page, also viewedReaders who viewed this page, also viewed:The politics of economicsFaber: Gloom, Boom or Doom?Wu-Tang FinancialBank leverage: forever blowing bubbles part twoPopping bubblesSearchLijit SearchAdvertisments sr_adspace_id = 3985607; sr_adspace_width = 300; sr_adspace_height = 250; sr_ad_new_window = true; sr_adspace_type = "graphic"; Archives Select Month November 2009 (53) October 2009 (160) September 2009 (106) August 2009 (93) July 2009 (172) June 2009 (113) May 2009 (135) April 2009 (129) March 2009 (179) February 2009 (141) January 2009 (128) December 2008 (117) November 2008 (99) October 2008 (198) September 2008 (162) August 2008 (147) July 2008 (214) June 2008 (220) May 2008 (119) April 2008 (78) March 2008 (40) Recent Posts Evidence that governments are underplaying peak oil Links: 2009-11-10 All bubbles are equal, but some bubbles are more equal than others News from around the web: 2009-11-09 The politics of economics The collapse of commercial real estate Wu-Tang Financial May the Lloyd be with you Rick Bookstaber to join SEC News from around the web: 2009-11-08 Recently Popular Consumer credit down, but does it show deleveraging? Bill Gross: Sell equities and buy Treasuries Sell equities The politics of economics Julian Robertson: “We’re in for some real rough sledding” The recession is over but the depression has just begun Faber: Gloom, Boom or Doom? Steve Keen: On the Edge with Max Keiser The less optimistic view of Treasury’s handling of the crisis May the Lloyd be with you Most Viewed Credit Crisis TimelineSwitzerland threatened with bankruptcyLetterman’s Top 10 George Bush momentsIs the State of California bankrupt?The Dummy’s Guide to the US Banking CrisisTop ten predictions for the 2009 global economyMarc Faber: I advise every American to hold his gold outside of the United StatesChart of the day: Dow 1928-1932The Swedish banking crisis response – a model for the future?Quantitative easing: printing money like mad to ward off deflation Resources TranslateTranslate to:ArabicBulgarianCatalanChinese (Simplified)Chinese (Traditional)CroatianCzechDanishDutchEnglishFilipinoFinnishFrenchGermanGreekHebrewHindiIndonesianItalianJapaneseKoreanLatvianLithuanianNorwegianPolishPortugueseRomanianRussianSerbianSlovakSlovenianSpanishSwedishUkrainianVietnamese var thestr = window.location.href; var mystrlen = 31; var sresult = thestr.indexOf( "www.creditwritedowns.com" ); if( sresult == -1 || sresult >= mystrlen) { document.write( ' ' ); document.write( 'return to original' ); }else{ document.write( '' ); } Powered by Google Translate. PollsSorry, there are no polls available at the moment.Polls ArchiveTagsbailout banking bankruptcy and foreclosure Barack Obama bond investing Britain business media capital markets China consumerism credit and credit cards crisis solutions deflation Democrats distraction economic depression economic indicators election Europe FDIC federal reserve finance financial bubbles financial crisis financial history financial leverage financial statements foreign exchange trading inflation economics interest rates investing jobs law and justice loans and lending market wizards monetary policy mortgages oil Politics predictions presidential elections regulatory capitalism residential property stocks United States
Recommended Links Compare Personal Loans Compare Credit Cards Our Site If you want to find out what's going on in the credit crisis, you've come to the right place.
See the Credit Crisis Timeline, which includes a timeline of major crisis events and links to a list of crisis events organized by financial institution. This is the most comprehensive data set of credit crisis-related events on the Internet.
To contact us, click here.
See more information about us.
Post Calendar November 2009 S M T W T F S « Oct «-» 12
Recommended Links Compare Personal Loans Compare Credit Cards Our Site If you want to find out what's going on in the credit crisis, you've come to the right place.
See the Credit Crisis Timeline, which includes a timeline of major crisis events and links to a list of crisis events organized by financial institution. This is the most comprehensive data set of credit crisis-related events on the Internet.
To contact us, click here.
See more information about us.
©2008-2009 Credit Writedowns. Proudly using WordPress Themes
Disclaimer: All data and information provided on this site is for informational purposes only.
Digg it
Bookmark it
Stumble it
Columbia University Professor and former Federal Reserve official Frederic Mishkin wrote a much-discussed Op-Ed in the Financial Times yesterday. In it, he asks
Are potential asset-price bubbles always dangerous?
He answers this question with a no, noting that some asset bubbles are more dangerous than others because of their connection to debt and credit. I agree with his delineation and assertion that some asset bubbles are more dangerous than others. But, his conclusion that the non-credit variety of asset bubble — what he calls the "pure irrational exuberance bubble" — is not dangerous is false. This is the same blinkered thinking which led to Nasdaq 5000 and its crash. Experience demonstrates that all asset bubbles are dangerous, some asset bubbles are more dangerous than others. Think Animal Farm: All bubbles are equal, but some bubbles are more equal than others.
The real question Mishkin attempts to answer is whether the Federal Reserve (where he once worked) or any other central bank should target asset prices so as to prevent bubbles from taking form.
Because the second category of bubble does not present the same dangers to the economy as a credit boom bubble, the case for tightening monetary policy to restrain a pure irrational exuberance bubble is much weaker. Asset-price bubbles of this type are hard to identify: after the fact is easy, but beforehand is not. (If policymakers were that smart, why aren't they rich?) Tightening monetary policy to restrain a bubble that does not materialise will lead to much weaker economic growth than is warranted. Monetary policymakers, just like doctors, need to take a Hippocratic Oath to "do no harm".
Are we to take this seriously? Even Alan Greenspan is showing more realism in the wake of our latest bubble. This man is outright dangerous. Don't be fooled; his piece is a plant. We have some serious asset bubbles forming right now and he is looking to give intellectual cover to the watch-the-bubble-and-clean-up-after-the-mess policy we saw on display in the late 1990s. Yves Smith thinks there is a connection between his statement and likely Federal Reserve policy.
What I find interesting is how the Federal Reserve under Greenspan had an explicit policy of targeting asset prices as a means of reflating the economy. Yet, Mishkin is saying they should not target asset prices as a means of deflating the economy. This is what is called monetary policy asymmetry, otherwise known as the Greenspan Put. It's not about targeting asset prices but looking for excess credit growth, which was certainly on display in the Nasdaq boom as well.
In effect, Mishkin is arguing for us to continue with business as usual. This is one of the more loathsome pieces of prattle I have witnessed since the financial crisis began. I hope no one takes this man seriously. I am ashamed that he is a professor at the business school I attended.
I would be remiss if I didn't point out his equally absurd piece of research on Iceland's economy before it collapsed. he wrote a piece called "Financial Stability in Iceland" with Tryggvi Herbertsson which stated:
Our analysis indicates that the sources of financial instability that triggered financial crises in emerging market countries in recent years are just not present in Iceland, so that comparisons of Iceland with emerging market countries are misguided.
No, Mr. Mishkin your analysis is misguided. It was with Iceland and it is here again. See below for a real analysis on Iceland from Willem Buiter and Anne Sibert which we can take seriously.
As I have been saying, you can get wildly different conclusions from two people based on the same facts and largely the same analysis. It goes to philosophical predisposition. What this FT article by Mishkin demonstrates is that no amount of real world evidence of the havoc that bubbles wreak will dissuade these ivory tower ideologues from supporting failed economic policy.
Sources
Read Full Article »