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Friday, October 17, 2008

Bubbles...back to the past.

I suppose it was inevitable. The Fed, after the disaster that was the Great Depression, pretty much decided they were not very good at identifying and then popping speculative bubbles like what we had in the stock market in the 1920s. Or did we? Economists to this very day, 79 years later, still argue about whether there was or was not a bubble in stocks back then. My answer is who cares? The Federal Reserve's perception was that there indeed was a bubble in stocks and that is what they acted on to send the economy into a tail spin. Messy history.

Before this current mess, many economists (like me and Chairman Bernanke) thought that the government ought not to be in the business of deciding what securities and equities should be worth, that is, being the so-called "arbiter of securities prices." Now that the Fed is going to start doing something about bubbles (see the link below), they are basically saying they know what the "correct" price is for assets, and that they are going to make it so. So be it. This is not going to be a seemless venture. There are going to be successes and failures like all parts of life.

But when the government starts deciding on prices, you might want to stock up your liquor cabinet. It may be a rough ride.

Then again, what has cold deliberate ignorance to the housing bubble gotten us?

1 comment:

Andrew_Grodner said...

Interestingly, when one looks at Dow Jones 1980-2008 it is clear that now we are back to the linear trend line as it is was defined in the period 1980-1995. In 1995 was the beginning of the bubble and there we went on and on, all the way to the housing bubble of the present day.

So assuming this is actual trend line, I wonder whether we would prefer to get where we are today in a straight line or through couple of upward bubbles? I assume we would not want to get there by downward bubbles. In other words, maybe indeed we should not care about bubbles as long as we move forward. Though on the other hand, bubbles add to the uncertainty and someone inevitably looses money during those wild swings.