He's Forever Blowing Bubbles

Over at the Financial Times, former Fed governor Frederic Mishkin is assuring us that the current Fed cash bubble is fine, and some bubbles are just really cool and helpful. Helicopter Ben's Magic Printing Press is awesome!

But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy.

Tightening monetary policy in the US or Europe to restrain a possible bubble makes no sense at the current juncture. The Fed decision to retain the language that the funds rate will be kept “exceptionally low” for an “extended period” makes sense given the tentativeness of the recovery, the enormous slack in the economy, current low inflation rates and stable inflation expectations. At this critical juncture, the Fed must not take its eye off the ball by focusing on possible asset-price bubbles that are not of the dangerous, credit boom variety.

Needless to say, Yves Smith at nakedcap sticks a fork in that bubble bull.

So now we have former Fed governor Mishkin, curiously stepping up now to defend the officialdom. I was told by a well-connected reader after the bloggerfest at Treasury that Team Obama was in full court press mode, trying to curry goodwill with others to burnish the perception of its financial policies. It isn’t hard to imagine that Mishkin was asked to assist.

It was Mishkin who in January 2007, argued that:

that this concern about burst bubbles may be overstated. To begin with, the bursting of asset price bubbles often does not lead to financial instability…Japan’s experience is that the serious mistake for a central bank that is confronting a bubble is not failing to stop it but rather failing to respond fast enough after it has burst….

With a track record like that, should anyone take anything he says about bubbles seriously?

Mishkin also argued:

one must assume that a central bank can identify a bubble in progress. I find this assumption highly dubious because it is hard to believe that the central bank has such an informational advantage over private markets…

Yves here. We have the counterexample of Ian MacFarlane, governor of the Reserve Bank of Australia, who set out to combat Australia’s housing bubble. He did so by beating up on the banks, frequently pointing out that housing prices had risen too far, too fast and probably did not represent a great investment, plus a couple of judicious rate hikes. Australia is generally credited with having done a much better job of contending with its housing bubble than any other country in the same fix.

Seems to me that selling Helicopter Ben and Timmy's plan is the whole point of the Fed these days.