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May 10, 2013

Paul Krugman: Bernanke, Blower of Bubbles?

Should we worry about bond and/or stock bubbles?
Bernanke, Blower of Bubbles?, by Paul Krugman, Commentary, NY Times: Bubbles can be bad for your financial health — and bad for the health of the economy, too. .... So when people talk about bubbles, you should ... evaluate their claims — not scornfully dismiss them, which was the way many self-proclaimed experts reacted to warnings about housing.
And there’s a lot of bubble talk out there right now. Much of it is about an alleged bond bubble.... But the rising Dow has raised fears of a stock bubble, too.
So do we have a major bond and/or stock bubble? On bonds, I’d say definitely not. On stocks, probably not, although I’m not as certain. ....
Why, then, all the talk of a bond bubble? Partly it reflects the correct observation that interest rates are very low by historical standards. What you need to bear in mind, however, is that the economy is also in especially terrible shape... The usual rules about what constitutes a reasonable level of interest rates don’t apply.
There’s also, one has to say, an element of wishful thinking here. For whatever reason, many people in the financial industry have developed a deep hatred for Ben Bernanke... As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy. ...
O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits ... are more than two-and-a-half times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher.
All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment.
For one important subtext of all the recent bubble rhetoric is the demand that Mr. Bernanke and his colleagues stop trying to fight mass unemployment, that they must cease and desist their efforts to boost the economy or dire consequences will follow. In fact, however, there isn’t any case for believing that we face any broad bubble problem, let alone that worrying about hypothetical bubbles should take precedence over the task of getting Americans back to work. Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job.

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