I would be interested to hear people’s critiques on this article - I actually find I enjoy the Economist for the very purpose of using their articles to sharpen my apologetic skills and defend my Austrian points of view against a more mainstream perspective. So besides the central theme of the article that we need the central bank to curb asset bubbles, what other points can you pick apart and why?
One of the points the author makes is stocks are different from all other goods in the sense that people buy more when the price goes up (stocks that is). How would the Austrian economist respond? Is this the simple distinction between saving and investing versus consumption?
How about the claim that the dot com boom “transferred” the wealth from pension funds to 20-somethings in Silicon Valley?
The most ironic part of the entire article is that the author references Hayek and his work on the socialist calculation problem, yet fails to mention Hayek and his work on the ABCT - the very thing he is ignoring in the article!
“A government would never have made a success of an iPod, iPhone or iPad whereas Steve Jobs at Apple was able to anticipate demand for such hand-held devices.”
Never is too strong. I agree a government would have been unlikely to have been as successful in the production and distribution of Apple merchandise, but never changes a probability to a certainty.
“This newspaper believes passionately in the principle of free markets. But in recent years it has also argued that central banks should do more to counteract bubbles, even though asset prices are also set through the market mechanism.”
Bubbles are a result of central banking policy: money supply expansion via depressed interest rates.
“This apparent contradiction can be resolved. Financial markets do not operate in the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the price of a financial asset rises, demand generally increases.”
Demand can rise when the cost to borrow money is depressed. Blame the central bank, not investors who respond to the distorted incentives it creates.
Inflation usually does not create happiness. Falling prices usually please consumers.
“The evidence is clear that the clean-up costs after debt-financed bubbles are too high. Central banks and governments do have to intervene when credit growth and asset prices (particularly in property) start dancing their toxic two-step. Asset markets do not work as well as those for consumer goods.”
The housing boom, bust, and ongoing recession are the government’s fault.
First financial assets behave like other things. People feel the prices are too low so they bid them up. And sometimes there is a herd mentality like around the last “Twlight” movie or around the launch of the Iphone. People value being first to get something and are willing to risk time and money to get it. There is no secret there nor do I have a problem with this behavior.
I do have a problem with the idea that it is the job of government to satisfy long term losers in a tranaction when those losers thought they were better off making the transaction at the time it took place. The concept that it is in the interest of people not privy to the loss to keep asset prices from falling. Not only is this concept supporting giant risk taking, but it is horribly unfair to those people who decided not to participate in the transactions of these financial assets. There is no moral reason that society or anyone else should be held liable for the decision of a person in a transaction they entered into freely.
Now on to the causes of asset, stuff, commodity, paper asset, whatever type bubbles: Bubbles according to web sites like this are the product of the creation of artifical money and/or credit. This is completely different than the explanation given in the article where just smoothly increasing asset prices cause by some unknow mechanism (I bet those pesky animal spirits are at work.) perfectly rational people to speculate using BORROWED MONEY. The article does not ask from whence they borrowers get their money for this speculation or even if this is emperically true. It is just enough for you non-economists that it happens, take their word for it. (Please note that the “Standard Textbook” version of the history around the crash of 1929 was that it was caused by “Speculation” with borrowed money and that does not hold up empirically.) (Please also note that absent the extra money and credit created by the Federal Reserve and other central banks, these bubbles would be signifcantly smaller with or without specualtive borrowing.)
The market is doomed no matter what you consider according to these clowns. If prices go down (what most people call deflation), the complain is that usually people will put their spending on hold, thus, tanking the market either further. Now this guy claims the exact opposite.. The market is doomed because people spend when prices go down… which is what he needs to do to “cleverly” contrast the behavior of consumption relative to investment… Unbelievable!!! The market is doomed no matter what…
Anyhow, this guy never heard of the crack up boom (hyperinflation). That’s when people rush to the stores and buy anything they can get their hands on precisely because prices in the department store are rising!
“This newspaper believes passionately in the principle of free markets. But…”
"in recent years it has also argued that central banks should do more to counteract bubbles, "
I agree. Bubbles are caused by central banks in the first place, so they should do more to counteract them. Mainly, stop printing money and there won’t be bubbles.
The gist of the article seems to be that people are pretty stupid when it comes to buying and selling stocks, and therefore lose a lot of money. I agree.
The continuation seems to be that since people lose a lot of money buying and selling stocks, therefore the central bank should get in there and tell them what to do. By coercion, naturally. For their own good, of course. After all, the central bank is always on the side of the little guy, as we know from experience. And the guys there are so much smarter than everyone else that of course we should be forced to defer to their judgement.