Wednesday, May 09, 2012

Sympathy for the federal reserve: Bubble 2.0

In the 90s we excoriated Greenspan for presiding over the dot-com bubble. Why didn't he include bubble management in price stabilization?

We never did recover from the crash of '99; but our real estate bubble made us feel better for a while. Then, of course, came the Lesser Depression.

Now, in the 10s, Krugman beats up on Bernanke for allowing systemic depression to persist and for failing to apply the counter-intuitive hydraulics of Keynes. My other economists stake out varying positions on the structural vs. systemic unemployment spectrum -- with most seeing a mixture of both with systemic causes persisting and structural causes, including technological, growing [1]. My team, generally speaking, favors both fiscal and monetary stimulus until we return to around 6% unemployment and "normal" economic growth. At that point Keynes says it's time to dial the inflow down (alas, that doesn't seem to happen very much. See dot-com bubble, above.)

The GOP, and especially GOP voters, mean that fiscal stimulus such as infrastructure development or government employment isn't a viable option. That leaves macroeconomic policy. Since low interest rates have run up against the famous zero bound, that leaves options like inflation targets.

But what should Bernstein do when, in the midst of the lowest labor force participation since 1984 (amongst white males the lowest since 1939) we see Bubble 2.0?

Mr. Bernstein has my sympathy.

[1] Sadly for my ego, nobody seems interested in whitewater/discontinuity disequilibria theories.

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