BUBBLE, BUBBLE….A couple of days ago Brad DeLong wrote about the need for the Fed to keep interest rates low, and who can disagree? With the job market as flabby as it is, the last thing we need is to slow down the economy by raising interest rates.
At the same time, though, Brad quotes Gerard Baker at length about interest rates, and Baker is scathing toward those who are apprehensive about the effect that continuing low interest rates have on, for example, housing prices. “Sado-monetarists,” he says, “should be restrained before they do us all needless harm.”
Now, perhaps living in Southern California makes me oversensitive to this, but it really does seem as though the housing market is pretty frothy at the moment. And if there is a housing bubble right now, and if it eventually gets pricked, as bubbles eventually always do, that could have a catastrophic effect on already weak economy, right? Just like the dotcom bust, except that the economy already sucks to begin with.
Or maybe not. But the nice thing about being a blogger is that I don’t have to just sit around and wonder about this. I know Brad reads this blog, so maybe he’ll take pity on my obvious bewilderment and offer us his ideas on this:
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Is it your thought that there actually isn’t a housing bubble right now?
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Or is there indeed a housing bubble, but it’s going to last a long time so it’s nothing to worry about?
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Or is the housing bubble both real and likely to burst in the near future, but for some reason you believe it won’t really do that much harm?
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Or is all of the above true, but there’s nothing much we can do about it?
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Or something else?
Basically, my question is this: there’s plenty of controversy over whether the Fed should pay attention to asset bubbles in the first place. Alan Greenspan apparently thinks not. However, assuming that the problem is real but that we don’t want to raise interest rates just to cool down a bubbly housing market, is there anything else that can be done? What kind of leverage is available to slow down a housing bubble aside from raising interest rates? And should we use it?
