Is Preventing Asset Bubbles Worse For The Economy? Reprint Of My December 2009 Post

The following is a reprint of my blog post of December 14, 2009, "Is Preventing Asset Bubbles Worse For The Economy?"

Monday, December 14, 2009

Is Preventing Asset Bubbles Worse For The Economy?

Posted By Milton Recht

But would we have destroyed Amazon.com, Ebay and Google to name a few very successful internet companies in the process of controlling the internet bubble? Will the long term effect of a remedy for controlling asset bubbles, destroy future industries? Wasn't Holland's tulip industry the result of tulip bulb mania, a bubble?

How does government distinguish from innovation and asset bubbles? Innovation and new industry result in a rush of new investment, asset price increases, financial collapse of many participants, asset declines and survival of a few big winners that go on to create new opportunities and economic growth. Can we distinguish innovation from so-called bubbles, which have no positive economic and social welfare effect?

By preventing bubbles, we prevent major investment in new technologies, processes and industries. We will create a world with very little economic growth, a world without structural shifts in technologies, if our goal is to prevent new bubbles.

If we believe in increasing asset price bubbles and want to prevent them from occurring, shouldn't we also believe in decreasing asset price bubbles, where prices collapse too far and too fast and want to prevent price declines also? Isn't preventing bubbles really just an alternative way of saying we do not want major price changes? Wouldn't prevention of price movements substantially distort the world's economies and lead to worse results than any asset bubble?

Isn't it is better to figure out remedies for the occasional negative effects of bubbles than to try to prevent them from happening?

And of course, there is always a possibility that asset price bubbles and eventual collapse are a rational response to economic events at the time that we are too ill informed to understand correctly.

My comment to "Using a hammer or a wrench to pop asset price bubbles?" by Antonio Fatás posted on the Antonio Fatas and Ilian Mihov on the Global Economy blog.