Friday, January 8, 2010

Leonhardt on Bernanke’s Speech

David Leonhardt is The New York Times economics reporter. He’s pretty good; you should always read him, but he isn’t good enough that you should always accept what he says.

His piece on Bernanke’s speech at the AEA meetings appeared on January 6 and was titled “Fed Missed This Bubble. Will It See a New One?”

He notes that Bernanke is implicitly asking for the Fed to be given more power when they’ve just done a lousy job, and takes the position that reasonable people shouldn’t immediately agree to this.

Leonhardt is most bothered by the fact that the Fed didn’t recognize that there was a bubble in housing prices.

Bernanke’s position is that bubbles are hard to spot until it is too late. I’ll note that this is the consensus among economists.

I think Leonhardt is being self-serving. He is (and kudos to him) one of the people who said there was a bubble. So, his position is influenced by the fact that it was obvious to him. But, it wasn’t obvious to everyone else, and there was considerable disagreement about this in 2004-6.

So, if Leonhardt thinks attacking bubbles is a good thing, it would be useful to ask him 1) what bubbles are out there right now that need attacking, and 2) what are the effects if you attack a bubble and it isn’t one?

I’ll add two points.

First, if we look at the tech stock bubble of 1998-2000, it’s clear that there were many bubbles in individual stocks, but that it is much harder to make that case for the whole market since a lot of the aggregate stock value is still with us today, just spread over a smaller set of firms (e.g., Google, Cisco, Apple, Verizon).

Second, a bubble – by defintion – should be something irrational that can’t be repeated. Except that this is not the first time we’ve had a real estate price bubble in southern California. If this is a repetitive phenomenon, then the whole bubble position has to be thrown out.

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