Should economists and policy makers have identified the housing market bubble before it burst? The answer is most likely no, says the Federal Reserve Bank of Boston, because economic theory was not up to the challenge.I have not yet read the original paper, but have been dumbfounded by all the learned finger-wagging about something that (i) we can best define in hindsight; and (ii) we can bet on/bet against if we think we "know something".
“Economic theory provides little guidance as to what should be the ‘correct’ level of asset prices — including housing prices,” the new paper published by the bank says. It was written by economists Kristopher Gerardi, Christopher Foote and Paul Willen.
In this morning's WSJ, Jeremy Siegel and Jeremy Schwartz argue that we are now in a bond bubble. The arguments and the data are laid out and we can make whatever bets we like. Some of us will be right and some will be wrong.
In recent house-price bubble history, a confluence of events worked in concert to push up house prices; we want policy makers to do less to contribute to such episodes. Perhaps stick with a Taylor Rule. But that's not the same as asking them to do more and deflate bubbles when they think they see them.
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