Obama administration to regulate economic bubbles
The Obama administration appears ready to identify new bubbles and deflate them slowly before they burst and take the economy into a recession. This sounds like a good idea, given the fact that the early 1990s recession led to the dot.com bubble which burst and then led to the housing bubble in the US. Politico reports:
As he battles the economic downturn, President Barack Obama is bracing Americans for a recovery different than any in recent memory – not a go-go return to prosperity like the 1990s but a slow, steady climb to stability.
“We know that an economy built on reckless speculation, inflated home prices and maxed-out credit cards does not create lasting wealth. It creates the illusion of prosperity, and it’s endangered us all,” Obama said recently.
But what Obama rarely says about ending the “cycle of bubble and bust” is this: He’s 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.
According to Austan Goolsbee, a key Obama economic adviser, the president plans to focus on stopping bubbles along with preventing busts. And in an interview with POLITICO, Goolsbee said the administration will be on the lookout for new bubbles, like the tech stocks or housing prices.
If new threats are spotted, he said Obama would use “regulatory oversight to prevent guys who want to make a quick buck from doing real harm to the economy. … That is what it means to get out of the bubble-and-bust cycle.”
Of course the libertarians and free-marketeers would decry this move, but one need only look at graphical evidence to know that economic growth built upon rising GDP based on an inflating isn’t sustainable. See the graph at the left. Libertarians may argue that any bubbles which are inflated way beyond the intrinsic value of the asset would eventually undergo a “market correction”. That’s true, except that when bubbles burst, they take the economy down with them and cause middle- and lower-income groups to lose their jobs, a tad unfair especially if you consider they weren’t responsible for inflating the bubble in the first place.
Now of course with this comes the problem of how to identify market upticks as bubbles and how exactly to regulate them:
For one thing, it’s nearly impossible to tell whether a market increase is a bubble or not from the inside. During both the tech stock and housing bubbles, there were influential national figures arguing that the price run-up was based on real value, not imaginary gains. Simply deciding when to call a market increase a bubble would be fraught with controversy.
It’s too early to be optimistic. Like most plans on paper (and speeches of major policy initiatives), it looks good, but the actual policy initiative may not have sufficient bite and effect to accomplish its goal. Remember the Geithner plan? How far is Obama willing to go this time?