Here's the idea: Bubbles are like cholesterol. There are "good" bubbles, like the tech bubble, which leave some positive things behind (say the Internet) and produce a relatively mild recession, and "bad" bubbles, like the mortgage mess we now have, leaving us with a really nasty economic downturn, a bunch of empty townhouses and fewer investment banks. Hilsenrath makes the Fed connection. Alan Greenspan argued the Fed couldn't do much about the tech bubble and let it go. Ben Bernanke -- an interesting image -- is trying to wrestle the mortgage bubble to the ground.
All this is fascinating, perhaps even enlightening. But it does make you wonder if we're not gilding the past, which is receding, and getting overly depressed about the present, which is, as we know, the car wreck immediately in front of us. In 2001, Greenspan was harshly criticized for his hands-off stance on the tech bubble; in fact many critics blamed him for creating it. At the time, as stocks were falling and big industries -- dot-coms, telecoms -- were cratering, it seemed pretty serious. Today, for all the mess in the credit markets, we still can't definitively say we're in recession; and many of the metrics, like unemployment, are holding up decently well. I'm not saying we're not heading into the darkness, but I do recall hearing that forecast bandied about in, say, 2001. Enron and Worldcom were pretty serious implosions. And the tech bubble featured Sept. 11, as well.
We can't even be close to certain of a full accounting from the mortgage mess. Sure, banks have taken big write-downs, but millions of Americans bought homes tossed up by the bubble. Many will keep them. Others were speculators, so they shouldn't count. All that's hard to quantify when every politician on earth argues that getting the American dream of homeownership can't be valued (until, of course, it's time for a reset or a write-down). The fact is economic bubbles are wonderful examples of not really knowing what they are until they're deceased. How drunk were we? If Greenspan or Bernanke had any clue that subprime would morph into a credit crunch, they had the tools to deflate the mania, but they didn't. They either misjudged the situation or felt it wasn't a role for an independent central bank.
That latter reason has more currency than the Fed crowd, which likes to talk about all the levers and buttons in the central bank control room, often admits. Greenspan, in particular, didn't like wading into political battles that would deflate his -- and the Fed's -- standing; and bubble management is a long way from managing inflation. Despite his stature in Washington, Greenspan assiduously sidestepped threats to Fed autonomy -- the kind of threats that Bernanke has been forced to tackle. After all, bubbles are, at least as much political and social as economic. They result from a collective judgment, which is why they're so powerful and so intoxicating. It's hard enough to know when, or if, to unsheathe the needle to prick the balloon. It also requires real guts to withstand the howls of pain from those convinced it need not happen at all; and once it's done, you'll never know if it was truly necessary. And if that's not hard enough, it's asking even more to accurately forecast separating out the good bubbles from the bad. - Robert Teitelman
See story from The Wall Street Journal
See story from BusinessWeek
We're beginning to see a new meme offered out there for all those Federal Reserve wannabes: bubble taxonomy. Jon Hilsenrath discussed the differences between this bubble and the tech bubble in 
