Bubble, Bubble, Toil and Trouble: Babbling Barons of Bubbleism Alert!

. . . important subtext of all the recent bubble rhetoric is the demand that Mr. Bernanke and his colleagues stop trying to fight mass unemployment, that they must cease and desist their efforts to boost the economy or dire consequences will follow. In fact, however, there isn’t any case for believing that we face any broad bubble problem, let alone that worrying about hypothetical bubbles should take precedence over the task of getting Americans back to work. Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job.

. . . As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy.

For those who fear the bubbles, Paul has a few calming words.

And they should make us feel muuuuch better. After all, would you buy bonds at 2% expecting the Fed to raise the interest rate much in this never-ending (due to low job creation) Great Recession? I think they'd like to lower it more if they could. But, well, okay. They are scaring us with all that stupid bond bubble talk when we know that it's a stock market bubble. Or do we?

May 9, 2013

Bernanke, Blower of Bubbles?

By Paul Krugman

Bubbles can be bad for your financial health — and bad for the health of the economy, too. The dot-com bubble of the late 1990s left behind many vacant buildings and many more failed dreams. When the housing bubble of the next decade burst, the result was the greatest economic crisis since the 1930s — a crisis from which we have yet to emerge.

So when people talk about bubbles, you should listen carefully and evaluate their claims — not scornfully dismiss them, which was the way many self-proclaimed experts reacted to warnings about housing.

And there’s a lot of bubble talk out there right now. Much of it is about an alleged bond bubble that is supposedly keeping bond prices unrealistically high and interest rates — which move in the opposite direction from bond prices — unrealistically low. But the rising Dow has raised fears of a stock bubble, too.

So do we have a major bond and/or stock bubble? On bonds, I’d say definitely not. On stocks, probably not, although I’m not as certain.

What is a bubble, anyway? Surprisingly, there’s no standard definition. But I’d define it as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. Dot-com prices in 1999 made sense only if you believed that many companies would all turn out to be a Microsoft; housing prices in 2006 only made sense if you believed that home prices could keep rising much faster than buyers’ incomes for years to come.

Is there anything comparable going on in today’s bond market? Well, the interest rate on long-term bonds depends mainly on the expected path of short-term interest rates, which are controlled by the Federal Reserve. You don’t want to buy a 10-year bond at less than 2 percent, the current going rate, if you believe that the Fed will be raising short-term rates to 4 percent or 5 percent in the not-too-distant future.

But why, exactly, should you believe any such thing? The Fed normally cuts rates when unemployment is high and inflation is low — which is the situation today. True, it can’t cut rates any further because they’re already near zero and can’t go lower. (Otherwise investors would just sit on cash.) But it’s hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges, and there’s no hint in the data that anything like that is going to happen for years to come.

Why, then, all the talk of a bond bubble? Partly it reflects the correct observation that interest rates are very low by historical standards. What you need to bear in mind, however, is that the economy is also in especially terrible shape by historical standards — once-in-three-generations terrible. The usual rules about what constitutes a reasonable level of interest rates don’t apply.

There’s also, one has to say, an element of wishful thinking here. For whatever reason, many people in the financial industry have developed a deep hatred for Ben Bernanke, the Fed chairman, and everything he does; they want his easy-money policies ended, and they also want to see those policies fail in some spectacular fashion. As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy.

And one should never forget the example of Japan, where bets against government bonds — justified by more or less the same arguments currently made to justify claims of a U.S. bond bubble — ended in grief so often that the whole trade came to be known as the “widow maker.” At this point, Japan’s debt is well over twice its G.D.P., its budget deficit remains large, and the interest rate on 10-year bonds is 0.6 percent. No, that’s not a misprint.

O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits — which are, after all, what stocks are shares in — are more than two-and-a-half times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher.

All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment.

For one important subtext of all the recent bubble rhetoric is the demand that Mr. Bernanke and his colleagues stop trying to fight mass unemployment, that they must cease and desist their efforts to boost the economy or dire consequences will follow. In fact, however, there isn’t any case for believing that we face any broad bubble problem, let alone that worrying about hypothetical bubbles should take precedence over the task of getting Americans back to work. Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job. 

And it looks like the Rude Pundit has finally joined those of us who are deeply upset at both the lack of knowledge or the lack of leadership shown by Obama (if not outright Bush/Cheney-like behavior during this administration's ongoing "surveillance state" morass). The AP telephone records-suborning madness is the final straw (among the many now being touted on all the faux news channels) he sees in the long-expected GOP grasp for a "high crimes and misdemeanors" level  impeachment action. Remember how Ken Starr found Monica Lewinsky after trying to find something impeachable on Clinton for over a year? Well, the GOP never gives up (or admits any type failure during its fight to maintain control of the message) and the Dims seem to have either folded their tents or joined the other side long ago. At the end of his essay he says he hopes to take back his words soon, but has no real expectations to do so. Would that there were.

This week marked the end of the Obama presidency. No, he won't be forced out of office, but he will be forced to make do with whatever he can accomplish alone, which, at this point, is extraordinarily little. The Benghazi investigation was worthless to anyone not on Rand Paul's mailing list. But the IRS's questioning of Tea Party groups is mildly disconcerting, even if it doesn't rise to full-blown "scandal" proportions, and the Justice Department's subpoena of the phone records of AP reporters is genuinely scary, perhaps because chances are that it was perfectly legal. Still, what is true, what is legal, and what is real don't matter anymore at this point.

The reason why the Rude Pundit is declaring the Obama presidency done is not merely because the IRS story confirms everything that paranoid right-wingers believe about Obama, as The Daily Show discussed last night. No, it's done because the AP story confirms everything that liberals and libertarians feared about Obama's embrace and expansion of the surveillance state established under Bush and Cheney and his immensely troubling silencing of whistleblowers. The press is gleefully, grotesquely feeding on the outrage.