On April 8 I commented upon William C. Dudley’s “Asset Bubbles” speech.
There is much I can comment about in each of Mishkin’s commentaries about bubbles. For now, I will limit myself to the following:
Here is a passage from the aforementioned 2008 speech which I found most interesting:
“…monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability. This monetary policy response should prove sufficient to prevent adverse macroeconomic effects of some types of asset price bubbles.”
I interpret this (and other points in his speech) as (in effect) saying that monetary policy shouldn’t be used to prevent bubbles, but it should be used to “clean up the mess” should they “pop.”
This “mindset” seems to be prevalent now among policy makers.
I believe this overall “treatment” of bubbles is frightfully perilous, has already created immense damage, and will end very badly.
It appears as if not only are we (as a nation) downplaying the risks of bubbles, but also are continually unable to identify their existence.
As I wrote on March 29: “I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about….While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.”
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SPX at 1217.28 as this post is written