Thursday, May 26, 2005
Krugman - what could the next bubble be?
Krugman in today's NYT follows the bouncing bubble. First, we had the stock market bubble. Then the FED chose to avoid an adjustment in 2001 by creating a new bubble, lowering interest rates and pumping up real estate. Krugman wonders where the FED can go from here, as there isn't any other obvious asset class to inflate to keep this rolling bubble from running out of hot air.
A few days ago, Bernanke said if we hadn't run big fiscal deficits the past few years, the imbalance in the real estate market would have just been that much bigger and it would have that much further to fall.
But I wonder. What would really have happened if the government had limited its fiscal intervention to the rebates of 2001, rather than cutting tax revenues to the lowest level post WW II?
I can't imagine all that money would just have flowed into the home mortgage market, with negative real interest rates. Some of it, perhaps, but not all of it. Something else would have to happen. Maybe, just maybe, the classical thing would have happened: we wouldn't have gotten quite so far out on a limb with our fiscal and external deficits.
Those are two more bubbles that have been inflating alongside the real estate bubble. And maybe the answer to Paul Krugman's question is, too bad we won't have the option of relaxing fiscal and trade positions as an alternative when the real estate bubble, since there's already an unsustainable level of froth in both the fiscal and external trade balance fronts.
Maybe, just maybe, a good chunk of that excess fiscal stimulus might have ended up as national savings, and a somewhat smaller trade imbalance, and somewhat less inflationary pressures on commodity goods like oil and steel. Maybe, just maybe, we could have worked though the excesses rather than pushing into new asset classes to inflate.
A few days ago, Bernanke said if we hadn't run big fiscal deficits the past few years, the imbalance in the real estate market would have just been that much bigger and it would have that much further to fall.
But I wonder. What would really have happened if the government had limited its fiscal intervention to the rebates of 2001, rather than cutting tax revenues to the lowest level post WW II?
I can't imagine all that money would just have flowed into the home mortgage market, with negative real interest rates. Some of it, perhaps, but not all of it. Something else would have to happen. Maybe, just maybe, the classical thing would have happened: we wouldn't have gotten quite so far out on a limb with our fiscal and external deficits.
Those are two more bubbles that have been inflating alongside the real estate bubble. And maybe the answer to Paul Krugman's question is, too bad we won't have the option of relaxing fiscal and trade positions as an alternative when the real estate bubble, since there's already an unsustainable level of froth in both the fiscal and external trade balance fronts.
Maybe, just maybe, a good chunk of that excess fiscal stimulus might have ended up as national savings, and a somewhat smaller trade imbalance, and somewhat less inflationary pressures on commodity goods like oil and steel. Maybe, just maybe, we could have worked though the excesses rather than pushing into new asset classes to inflate.
