Three Things I Think I Think – Bubble Spotting Edition

Here are some things I think I am thinking about:

1)  Dean Baker says bubble spotting is easy. Dean Baker was among the few people who spotted the housing bubble fairly early. In a recent blog post he goes through how he identified it and asserts that this was “easy”.  He says it was inexcusable for policymakers to be blindsided by it.

Hmmm. I don’t know about that. I remember the housing bubble quite well because I too was adamant that there was a bubble. I will never forget the first time I laid eyes on the Case Shiller real price adjusted housing chart around 2005. This was 100+ years of data with an outlier so huge that you had to be a buffoon to say this was anything normal. But I am not sure how useful that really would have been for policymakers. After all, by the time an asset bubble has developed and been identified it’s too late. Policymakers don’t have the tools to stop asset bubbles from mean reverting.

I mean, what else could the Fed have done? They were raising rates rapidly. They were monitoring financial conditions and lending in the overnight market. But the Fed cannot control the quantity of loans that are made, how loans are made or how many people purchase homes. These elements are outside of the control of policymakers yet we act like policymakers have this Archimedean Lever over the economy. It doesn’t quite work like that. The housing bubble might not have been difficult to identify, but no one knew how devastating it was going to be and policymakers certainly didn’t have tools that would have eliminated its negative impact.

2)  Dean Baker says negative rates are stupid.  (If you think I have a man crush on Dean Baker then you’re wrong). Now that that’s out of the way….He is dead right about negative interest rates. Dean says negative interest rates are a tax on the banking system that will just get passed on to bank customers.