Bubble, bubble, no toil, no trouble.
Former Fed governor Fred Mishkin’s FT op-ed piece today is drawing some aggressive fire, as he contends that certain asset bubbles are less dangerous because they don’t cause the financial system to “seize up.”
Not all bubbles are a risk to the economy, Mishkin asserts, so this isn’t the time for the Fed to step in to burst one now.
But that’s like making the argument that “nuclear wars don’t have to be bad for you,” Yves Smith writes at naked capitalism.
“Mishkin’s arguments are absurd, except they reflect the Fed’s complete unwillingness to take on this task. It is much easier to offer the excuse that you are incapable (and talk yourself into it), than deal with the bigger issue: that pricking an asset bubble is unpopular.”
At The Big Picture, James Bianco calls Mishkin’s piece “a lame attempt” by the Fed “to defend itself against bubble creation.”
He notes that in January 2007, Mishkin in a speech questioned whether central banks should burst asset-price bubbles. “Given the uncertainty about the effect of interest rates on bubbles, raising rates to deflate a bubble may do more harm than good,” he said at the time.
“Instead of apologizing for his completely wrong and destructive ideas of less than three years ago, Mishkin is now arguing that the Federal Reserve has it all figured out,” Bianco says.
“Not only can they now identify a bubble, but Mishkin has decided that if we are having another bubble not to worry as it is not the bad kind. Fred, didn’t you do enough damage three years ago? The world does not need another Federal Reserve official making stuff up to justify current policy.”
Our own take? Mishkin’s ”pure irrational exuberance bubble” may well be ”less dangerous” than a “credit boom bubble,” but the bursting isn’t necessarily less painful. To assert otherwise is an insult to the citizenry which the Fed purports to serve.
Just ask the folks who got cleaned out when the tech boom went bust, and the Nasdaq Comp fell 74% peak-to-trough.
And with the S&P 500 up more than 60% from its March low, and investors’ risk appetite looking as strong as ever, we may eventually have another cohort to survey on what’s left behind when the bubble pops.
