The Irrational Mr. Mishkin

November 13, 2009
In the November 9 Financial Times, Frederic Mishkin, a former Federal Reserve governor, proved that the Fed has learned absolutely nothing from its Greenspan-era forays into dangerously low interest rates. Mr. Mishkin claims in the title of his editorial that “Not all bubbles present a risk to the economy.” I’m not sure which word Mr. Mishkin is misunderstanding: “bubbles,” “risk,” or “economy.” Mishkin goes on to make a lame distinction between what he calls “credit boom bubbles,” like the one that led to the current worldwide recession, and a more benign variety that he calls “pure irrational exuberance bubbles.” Mishkin says that the tech bubble was of the benign irrational exuberance variety. That’s nonsense. Asset bubbles are always dangerous and distorting. Resources are misallocated, irresponsible financial actors are rewarded unjustly, and bursting bubbles destroy the retirement savings of millions of investors. The tech bubble was not benign, and the damage to the economy was only contained because the Fed was inflating a much bigger bubble in the housing market-a bubble that Mr. Mishkin himself claimed didn’t threaten economic instability. Nice foresight. Unfortunately, I am afraid, Bernanke is sympathetic to Mr. Mishkin’s view on asset bubbles. I’m not. The Fed should either clamp down on bubbles sooner, or get out of the monetary policy business. Truthfully, I favor the latter.