Simon Johnson has a post up at
The Baseline Scenario commenting on a speech by New York Federal Reserve chief William Dudley, who makes the case for the central bank's ability to prick growing bubbles. The speech, as Johnson points out, was given in late June but quietly released on July 3 -- a federal holiday now known as Sarah Palin resignation day.
As Johnson notes, Dudley's claim at bubble busting breaks with central bank tradition and with Alan Greenspan; it also implicitly suggests that the Fed could have done something about the housing bubble. This fits neatly into the quiet argument the Fed is now making to Congress for the powers of the "macroprudential regulator," the new jargon for what we used to call (a few weeks ago) a systemic or stability regulator. As this mounting plethora of names suggests, the powers the Fed would be taking on are hazy, undefined and open ended. Dudley seems confident that bubbles are easy to identify, target and burst. Johnson is skeptical, raising the issue that retrospectively that's always the case and wondering if two current examples -- emerging markets and Treasuries -- are, as some have argued, bubbles in utero.
If you travel back earlier in the decade, you discover that after the dot-com bust, there was a promiscuous tendency to label any rise in prices, narrow or broad, short term or long, as "bubbles." The bubble metaphor became a component of the conventional wisdom, nearly as popular as the cliché "perfect storm," and applied to sports teams, presidential candidates and the ascent of pop stars, not to say financial assets. This promiscuity diluted the term. If stock prices rose for a few days, there was a bubble brewing; if a rash of M&A deals emerged one week, there was an M&A bubble. Even housing began to wear the bubble label by 2004. Not that it mattered: The word had been bled of all meaning, all bite. The technical definition of a bubble, that price had lost touch with underlying value, was lost (and, it might be argued, that in a world overlaid with as much abstraction as our own, either in finance or in the popular culture, value is always a dicey proposition -- as we discovered in the credit crunch with fair value accounting or in, say, the death of Michael Jackson).
Why would anyone think anything has changed? Does Dudley believe that the Fed is immune from tendencies of the larger culture, even if it can mount the necessary technical assault on bubbles? And even if that's so, the Fed will be under the thumb of a Congress and White House that is clearly not technically proficient (that's kind) and more attuned to the wackiness and waywardness of the broader culture. The process of bursting financial bubbles begins with technical judgments, which remain murky; but they end with politics. After all, there is simply no way for a central bank to prove that it avoided Armageddon. The key, in a sense, is not the ability of economists to forecast (which we should be skeptical about), it's the maturity of the political class to accept that such wisdom exists. Right now, Congress can't even decide if we're heading for inflation or deflation, that we have too much stimulus or too little. How would Congress ever accept Fed intervention in a booming economy?
Johnson's conclusions on all this seem right too: We're fated to continue to suffer through booms and busts, so we better decide how to deal with too-big-to-fail and cleanups. Well, OK, that's sort of what we suspected all along. What's more worrisome is what happens to the Fed if it dons its macroprudential robes and guesses either right or wrong.
- Robert Teitelman
Robert Teitelman is the editor in chief of The Deal.See Johnson's post on The Baseline Scenario
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You say: After all, there is simply no way for a central bank to prove that it avoided Armageddon.
Heck, there's no way to prove that you "saved" 5 million jobs, yet, I bet that within one year, we will hear that argument put forth by President Obama.