You make implicitly a key point regarding bubbles which also bears upon his rather pessimistic surmise regarding the efficacy of interventions against them, that bubbles in different kinds of assets require different _kinds_ of intervention; that being so, central bankers may be, and in fact are, ill-equipped to act against some kinds of bubbles. For example, it is quite awkward for CBers to act against equities bubbles, just as you point out. They really fall more to the lot of equities regulators. Another point you make here with which I concur, and it is perhaps the key underlying issue underlying Macfarlane’s remarks as I read them, is that as presently constituted central banks are not charged with _preventing_ asset bubbles, either explicitly or implicitly. I’ve stated before that I very much believe that this should become a central part of their policy mission—but to this point, it isn’t. Politically therefore, it is a hard go for a central banker to contract credit or the money supply to snuff out a bubble. At the least, said CBer would make tentative movements, which by definition are of limited effect; Macfarlane’s own actions which you cite are perhaps direct evidence of this.

The easiest and most direct way to slow down and eventually reign in bubbles is to require that cold hard money in escalating amounts be put up for purchase of assets trading into bubble ranges. Yes, some folks will throw away every dollar they have, but the point is to keep them from borrowing money they don’t have to throw it away, too. Call this the disc break approach. Many other tools could be defined, but again in fairness to Macfarlane the armory of the central banker is meagerly stocked for this mission at present.

On the other hand, I continue to hold that bubbles are easy _to identify, the central issue of my beef with Macfarlane’s statements. During the 80s for entirely different reasons, I read most of the historical material on major speculative bubbles; some economic evals, and most all of the history. These processes just are very evident; nearly everyone was FULLY evident to some commentators at the time. One has to go back to the early 18th century when capital liquidity on a mass scale was a fairly new phenomenon for bubbles to have been not well understood as such by participants. Since then, the historical evidence for comparison is simply too blatant to miss. Personally, I was convinced that dot.bomb was a bubble by 1995, because it look exactly like every other mania. A key issue is the one CANNOT rely upon current assessments by interested parties: they always drink the kool-aid and see pretty colors. One has to do historical comparisons, and trend comparisons; if this is done, wide divergences just scream, and you can tell that, on any historical measure of comparison, a trajectory is a bubble trajectory. I might say that for timeframes of less than a year, it may be hard to get a good read, which is why I mentioned that side issue in my post above. Identifying that a bubble is happening is the easy part if one wants to understand the process. It’s the wanting that’s the hard part. For the record, I profited not a farthing from dot.bomb. Perhaps that makes me a certain kind of fool, but then money isn’t my drug of choice.

Despite all that, I’m not going to claim some special expertise; I have an informed opinion, no more. I thought that property in the US and some markets was patently in bubble mode. I am not convinced, by contrast, that commodities are presently in a full-on bubble. There clearly seems to be speculative flows, but the issue is greatly complicated by currency malalignments, concurrent deflation of other assets, and supply constraints over against demand: this situation is not clear cut. I definitely expect that many commodities will remain well-above past trend trajectories, and that we won’t get a good picture on ‘real’ values until we get a new global currency regime stabilized—which may be some time a-comin’. I don’t have all the material handy and I’m not current on it either, but historically commodities typically went vroom following the distortion of currency-driven price spikes. From that perspective, our present commodity price spikes would look like _the historical norm_ given our immediate past; these spikes just don’t look like our immediate past, is all.

To Anon of 2:31, you are soo right on central/money center bankers and their perspective at the turn of the 20th century. The 19th century was a graveyard of credit-fueled speculative sprees, in many countries and most especially in the old US of A. Loose credit, often provided by fly-by-night, minimally capitalized ‘wildcat’ banks and bank-like institutions made fools’-gold fortunes and hellzapoppin’ bubbles time and again, so big bankers had a tight-credit macro-policy by experience. Real estate was the speculative medium of choice, though not the only one. Now, with the financial de-reg of the 1990s, we have cast ourselves perfectly back to 19th century credit sprees, only on the steriods of the reserve currency and the amphetamines of global capital inflows. *yeeesshh* I know, I know, we don’t study history in this country; we’re too innovative for that, I’m told. “Everything old is new again,” is my response to that.

Next, WTF are they doing interfering in the market and propping up and subsidizing failed business models and ailing banks??? Let them fall. Nothing inspires prudence like fear.
The Fed has been propping up Banks since the Saving and loans debacle (and probably before that as well). Where we are now is a direct result of that policy direction by the Fed, through their interference in one “crises after another, and one asset bubble after another. They saved people and organisations that shouldn’t have been and continued to finance them through easy credit.

The Regulatory Authorities are the largest part of the problem in the first place. Giving them more powers is heroin to a junkie. Their only answer to the collapse of one bubble is to blow up the next one.
Now that they are struggling to achieve that, they want even more control of our financial system. All hail the command economy.

I have to differ with you on this one.

First, Macfarlane has cred on this issue. He, unlike just about any central banker I can think of, did intervene in an asset bubble, in this case Australian housing, roughly in 2004. I omitted the section where he talks about central bankers’ other tool, jawboning and public exhortation.

Macfarlane quite often in 2003 (if I recall right, Aussies welcome to correct) talked about how housing was overheated and posed a danger to the economy. That was a prelude to a couple of rate increases (I think a quarter point each, but remember pre Bernanke making 75 the new 25, as Barry Ritholtz so aptly put it, that sort of move would be taken pretty seriously).

It led to a sharp pullback in the most speculative sector, units, and cooled off the frenzy for a quarter or two. But then Macfarlane retired. I have no idea whether his successor kept the faith, but I do know the bubble continued.

You also dismiss the issue of damage to innocent parties and the difficulty of recognizing a bubble. Consider the dot-com boom. I was one of the minority who thought it was completely bonkers (and paid a price for that view), yet companies were turning over their entire business models to compete. McKinsey, for instance, took on a lot of dot com work in return for equity (which turned out to be worthless) so it could offer a dot com equity participation to staffers who otherwise would bolt to startups. Its annual turnover got to be 30% due to brain drain to dot coms. That’s a hugely disruptive level.

And worse, plenty of places like McKinsey were justifying the “this time it’s different” phenomenon. So if you are a central banker, and supposed experts like McKinsey (and non-experts like Business Week and of course CNBC) are defending the phenomenon, you are really sticking your neck out if you try to attack as asset bubble in the absence of other macroeconomic symptoms. And further recall the Fed is not as independent a central bank as the ECB or Bank of England is.

Moreover, the dot-com case, unlike housing, was not obviously related to gearing. Even at market peaks, margin debt is typically a pretty small % of total market cap. So you can’t attack it through regulatory channels. Your only means is the blunt instrument of monetary policy, which means you take down the auto industry, airlines, and housing, just to name a few. This isn’t as easy live as it looks in hindsight.

And most important, Macfarlane points out at some length that central banker lack a mandate to attack asset bubbles (in fact, per the auto/airlines/housing discussion, you could correctly argue that addressing them would run counter to the Fed’s mandate to create full employment). That obviously is changing as we speak.

Mish made this credit money argument yesterday last week on his post using monetary base vs. M’ (real money) etc. argument. Difficult to swallow. Credit is a merely a lagged margin call on future money – either it goes bust or you create money?

As for inflation and housing I remain at a loss to understand the nexus? The argument belies all your earlier posts on the affordability ratios. So unless I am missing something you are saying let inflation ride up asset prices but that doesn’t include a wages clearly. So how exactly does that have any impact other than deleterious on affordability ratios? Bottom line: Unless there is a wage spiral, there appears to be zero benefit. Could you clear this up as it is constantly repeatedly and is simply counterfactual?

Thanks for the comment. It confirms what I suspected.

Anon of 2:31 PM,

Good point, and one not made often enough.

bsetser