[DEBATE] : Obama's Magic Bubble Deflator

[Riaz K Tayob]

Obama's Magic Bubble Deflator
by Thomas E. Woods, Jr.
Auburn, Alabama


In case you've ever wondered what it must have been like to read Pravda, 
reading the American media's treatment of the financial crisis and our 
wise leaders' expert management of it all has given everyone a wonderful 
opportunity. For instance, check out this headline from a piece from 
several days ago on Politico: "Obama Would Regulate New 'Bubbles.'"

Yes, you read that right. "Bubbles" just occur spontaneously. They have 
no cause or explanation. We need government to identify and destroy them.

Sometimes I wish our overlords would get their stories straight. First, 
Alan Greenspan - whom the New York Times once described, in its typical 
toadying, totalitarian fashion, as "the infallible maestro of our 
financial system" - told us it was impossible to tell if a bubble 
existed at any given time. Now we have Barack Obama insisting that not 
only can we detect bubbles, but we can also deflate them with sufficient 
dispatch to prevent them from causing any serious economic disturbances.

How are we peons to decide between the competing views of our infallible 
maestro on the one hand and the man who would be FDR on the other?

I shouldn't be so cynical. It is not for us to question how our 
overlords intend to distinguish between genuine growth in some industry 
on the one hand and bubble conditions on the other. Just to be safe they 
may have to quash all rapid growth wherever it occurs. Perhaps they can 
cut off credit to an entire sector of the economy, or levy 
industry-specific taxation. (Anyone who thinks this type of discretion 
and micromanagement might be exercised with political motivations in 
mind, or for any purpose other than the common good, is almost surely a 
good candidate for surveillance in our progressive commonwealth.)
"Our present crisis was caused by excessive “leverage” you see – though 
we won’t bother asking where major economic actors managed to get all 
this credit in the first place. That might lead people to ask hard 
questions about the Fed yet again..."

In their quest to free us from economic instability, our betters may 
find it necessary to institute new rules. It is our job to accept these 
new rules with docility and thanks. These rules might have to be kind of 
sweeping, perhaps on the order of nobody may do anything. In liberal 
times that could perhaps be modified to nobody may do anything without 
asking permission. True, we could then wind up with a lengthy debate 
about whether asking permission itself counted as doing something, such 
that we'd need to ask permission in order to ask permission, in an 
endless regress. We'd then be back to the original nobody may do 
anything, which is probably the safest place to be anyway.

Or perhaps our rulers could shut down the electrical grid from time to 
time. I'd like to see those greedy fat cats inflate a bubble without any 
electricity!

Now the possibility that the government itself could be the primary 
culprit in the generation of asset bubbles is of course not merely 
rejected; the very idea cannot even be entertained. The great 
progressive institutions of government and central banking the causes 
rather than the solutions to our problems? Impossible!

Everyone knows Bad Things happen in the economy because of wicked 
speculators and grasping businessmen. If someone were to ask whether the 
Federal Reserve's creation of $8 billion out of thin air every week on 
average for four solid years might have had a tiny bit to do with the 
housing bubble, well, we'd have to remind such a cynic that the Fed was 
created in order to give us macroeconomic stability. Our present crisis 
was caused by excessive "leverage," you see - though we won't bother 
asking where major economic actors managed to get all this credit in the 
first place. That might lead people to ask hard questions about the Fed 
yet again, and as we've seen, the Fed is our Wonderful, Stabilizing Friend.

It is true that Anna Schwartz, the famous monetarist (and not an 
Austrian economist), recently observed that asset bubbles cannot form 
without loose monetary policy by the central bank to fund them.

"If you investigate individually the manias that the market has so 
dubbed over the years, in every case, it was expansive monetary policy 
that generated the boom in an asset. The particular asset varied from 
one boom to another. But the basic underlying propagator was too-easy 
monetary policy and too-low interest rates that induced ordinary people 
to say, well, it's so cheap to acquire whatever is the object of desire 
in an asset boom, and go ahead and acquire that object. And then of 
course if monetary policy tightens, the boom collapses."

(Schwartz also rejects former Fed chairman Alan Greenspan's "attempt to 
exculpate himself" for the housing bubble.)

Schwartz is here echoing what Austrian economist Ludwig von Mises said 
decades earlier. A sudden drive for a particular kind of investment will 
raise the prices of complementary factors of production as well as the 
interest rate itself. In order for a mania-driven boom to persist, there 
would have to be an increasing supply of credit in order to fund it, 
since investments in that sector would grow steadily more costly over 
time. That could not occur in the absence of credit expansion. The 
dot-com and housing bubbles can both be explained by artificial credit 
expansion, say such economists.

If we are to believe these economists, the best way to prevent future 
asset bubbles would be to stop the Fed from creating so much money out 
of thin air in the first place. Better still, we should abolish the Fed 
altogether, since in the view of these economists it is entirely 
superfluous to a market economy.

Again, though, our trust should be in princes. After all, Austin 
Goolsbee, an economic adviser to the president, assures us that Obama 
will be on the lookout for both bubbles and busts.

The president, Politico notes, is

"...prepared to intervene to make sure that kind of red-hot growth 
doesn't occur. And he's willing to do it with added government 
regulation if needed to prevent any one sector of the economy from 
getting out of balance - the way the dot-com boom did in the 1990s and 
the real-estate market did earlier this decade."

See, those things just happened! No cause. They just happened. And 
government will protect us from them.

Mark Zandi, a former economic adviser to John McCain, adds that 
"policymakers always intervene in a downturn. So it is necessary for 
policy makers to take action against bubbles. You've got to be 
symmetrical in your policy." What we need, says Zandi, is a "systemic 
regulator" who will decide whether or not bubbles exist and then take 
appropriate action. (See how much different a McCain administration 
would have been on the economy?)

Naysayers may point out that the Fed's own economists denied that a 
housing bubble existed, and that, as we observed earlier, Greenspan 
himself believes it's impossible to detect bubbles at all. But surely 
one more regulator, a big, giant, super-duper regulator, should be able 
to get things right.

Some people say the market is the best regulator. After all, the free 
market doesn't pump up the money supply and push interest rates down to 
levels that promote unsustainable bubbles. The free market punishes 
reckless risk takers, while it is government that bails them out (and 
thereby encourages them to take greater risks in the future). It was the 
Fed, not the free market, from which the "Greenspan put" - the implicit 
promise to bail out major Wall Street players - emerged. The Financial 
Times warned that these guarantees were encouraging dangerously risky 
investments. The free market makes no such guarantees, and thereby 
cultivates a more cautious class of entrepreneur.

But enough with these naysayers. I for one welcome our new overlords. 
Every American citizen could stand to learn from that model of filial 
piety, Britney Spears, who urged, "I think we should just trust our 
president in every decision he makes and should just support that, you 
know, and be faithful in what happens."

Amen.

Thomas E. Woods, Jr.
for The Daily Reckoning

Editor's Note: The above article was reprinted with permission from 
mises.org.