Bubbles, Booms, and Busts: What Have We Learned?
The always insightful and provocative George Selgin has some excellent commentary at Free Banking on the role of central banks in creating booms and busts. Selgin’s commentary and cautions to both monetarists and Austrians are excellent follow-ups to increased awareness of the importance of Austrian contributions by ‘mainstream’ economists recently highlighted here and here.
Selgin’s discussion along with these recent mainstream discussions provide a good time to re-asses some of what has been and still needs to be done within a capital-structure based macro (or perhaps following recent extension of ABCT by Andrew Young a time-structure based macro?). Selgin’s major suggestion for Austrians is that they pay more attention to the possibility of a monetary induced bust – the credit channel can work in both directions. A Freidman “pluck” may explain some ‘recessions’ or contribute to a more severe downturn and slower recovery from a boom induced bust. I would add real shocks a la RBC may also contribute to fluctuations. Monetarist, especially many market monetarist such as Scott Sumner, should recognize, as have many others; among them, Selgin’s list Anna Schwartz, Allan Meltzer, and John Taylor, and now Calvo, Borio, and White, that credit creation accompanied by artificially low interest rates can (and did recently back to back) create an artificial boom and subsequent bust. In fact, Calvo and Borio argue recent evidence strongly suggests credit booms precede financial crises and busts.
Roger Garrison (here, 446) makes two important points on what we should learn from the discussions:
- “The terms boom and bubble are often used interchangeably in the literature on business cycles. It may be preferable, however, to use boom—or more specifically artificial boom—to refer to the credit-induced simultaneous expansion to various degrees of different interestsensitive sectors of the economy and to use bubble to refer to the artificial boom’s most dramatic manifestation. Which sector reveals itself as the bubble depends on the circumstances in which the credit expansion occurs.”
- ABCT, when applied to an historical episode is a variation on a theme (Time and Money Ch. 6 or Andrew Young). Often central bank policy contributes to bubbles and booms by “As indicated earlier, artificial booms entail a turbocharging of whatever else is going on at the time.”