The Fed Shouldn't Pop Bubbles

A blog about business and economics.
Feb. 8 2013 4:16 PM

Stabilize Nominal GDP, Don't "Pop Bubbles"


Yesterday I complained that Jeremy Stein was wrong to leave fraud out of his list of institutional factors that can lead to credit bubbles, but I also disagree with his core contention that monetary policy ought to concern itself with the popping of bubbles. This seems like a hard question until you adopt a nominal GDP targeting perspective. But as you can see above, if you compare the actual path of NGDP in the aughts to the peak-to-peak trend line, then the mysterious aughts economy looks more explicable.

Instead of the Bush years launching with a "jobless recovery," you see that the Bush years launched with an extended period of sub-trend NGDP growth and ended with above-trend NGDP growth. This gets you Stein's conclusion, namely that loose money was bound up with the retrospectively identifiable bubble in house prices, but without committing the Fed to a forward-looking method, that depends on real time bubble identification. And indeed, you might ask yourself, "Why would the Federal Reserve care about a bubble in asset prices if it weren't leading to some kind of unsustainable boom in spending or income?" When I was a kid, there was a fad for baseball card collecting that led to what (in retrospect) looks like a bubble in the price of old baseball cards. These days, there's probably a bubble in yoga studios or some such. But it's not macro-relevant.


You need to regulate federally guaranteed institutions. You need to regulate fraudulent lending. And you need to try to stabilize the path of nominal GDP. Trying to predict and pop bubbles doesn't add anything and would be extremely difficult to do correctly.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


War Stories

The Right Target

Why Obama’s airstrikes against ISIS may be more effective than people expect.

The One National Holiday Republicans Hope You Forget

It’s Legal for Obama to Bomb Syria Because He Says It Is

I Stand With Emma Watson on Women’s Rights

Even though I know I’m going to get flak for it.

Should You Recline Your Seat? Two Economists Weigh In.


It Is Very, Very Stupid to Compare Hope Solo to Ray Rice

Or, why it is very, very stupid to compare Hope Solo to Ray Rice.

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

Why Is This Mother in Prison for Helping Her Daughter Get an Abortion?

Politico Wonders Why Gabby Giffords Is So “Ruthless” on Gun Control

Sept. 23 2014 4:45 PM An Up-Close Look at the U.S.–Mexico Border
  News & Politics
Sept. 23 2014 6:40 PM Coalition of the Presentable Don’t believe the official version. Meet America’s real allies in the fight against ISIS.
Sept. 23 2014 2:08 PM Home Depot’s Former Lead Security Engineer Had a Legacy of Sabotage
Sept. 23 2014 1:57 PM Would a Second Sarkozy Presidency End Marriage Equality in France?
  Double X
The XX Factor
Sept. 23 2014 2:32 PM Politico Asks: Why Is Gabby Giffords So “Ruthless” on Gun Control?
  Slate Plus
Political Gabfest
Sept. 23 2014 3:04 PM Chicago Gabfest How to get your tickets before anyone else.
Brow Beat
Sept. 23 2014 8:38 PM “No One in This World” Is One of Kutiman’s Best, Most Impressive Songs
Future Tense
Sept. 23 2014 5:36 PM This Climate Change Poem Moved World Leaders to Tears Today
  Health & Science
Sept. 23 2014 4:33 PM Who Deserves Those 4 Inches of Airplane Seat Space? An investigation into the economics of reclining.
Sports Nut
Sept. 23 2014 7:27 PM You’re Fired, Roger Goodell If the commissioner gets the ax, the NFL would still need a better justice system. What would that look like?