Problems I have with so called bubbles-

  • They can’t be identified with any certainty except in hindsight
  • Even if they could be identified with reasonable certainty, what are we supposed to do about them if we value economic freedom? There are plenty of annoyances that come with living in a free society and this is likely one such variety. If we try to do something about them we would no longer be free and I do not wish to replace the Fed with an investment Gestapo.
  • I do not believe the housing issue was a bubble if the term attempts to describe phenomena of free markets because it was the result of government regulatory distortion – the CRA, Recourse Rule changes, Fannie/Freddie removing risk to originators, etc… That wasn’t a free market outcome.

Bubble theory bother me because while market evolution is not completely efficient, it is the most efficient way of weeding out new developments into lasting value and benefits for society, and during the weeding market participants take losses. That’s just the way it is. Government cannot do that, fails every time it tries to pick winners and losers or shield investors, and I find the bubble theorists almost suggesting that it should provide value judgments for given markets even after the mess it made in housing. Certainly if one is looking for an argument for centrally planned economies or tyranny of the scarcity of money, bubble theory with its judgement and condemnation of free market behavior is it.