Nice breakdown of Mishkin’s piece. But, you give him far too much credit. First more background on the professor.

Mishkin was an advisor to Ireland where the banking system fared the worst. In May 2006 he penned a piece fo the Iceland Chamber of Commerce that was a good road map of how to do everything wrong and make you banking system blow up as much as possible during a financial crisis

http://www.zerohedge.com/article/mishkin-iceland-nothing-fed-here-dude

And as I noted above, in January 2007 he argued their was not housing or credit bubble. Further he said the Fed is incapable of spotting bubbles and if they could, they should not be in the job of pricking them. Today in the FT he now says it is not only easy to spot a bubble but they can be categorized into various types.

Let me be blunt. The FT article had no co-author and cited no academic or private sector research. It sourced no one else. In other words, he made all this up out of whole cloth, probably in an hour or two a few days ago.

So, thanks for the reasoned analysis. But you probably put more thought into your rebuttal than Mishkin but into writing it.

He is the Fed’s “useful idiot” and will say wahtever he is asked to say. Therefore, he does not deserve the kind of analysis and respect you afforded him.

The FT has an opinion piece by Frederic Mishkin today questioning whether we should be concerned about asset bubbles in the context of current everts. His conclusion wrt the US and Europe is: NO.

I disagree and wonder if others perceive his argument as valid. He appears to set up a false dichotomy, at least false in this instance. He distinguishes between a bubble generated from multiple credit overlays and one merely arising from ‘irrational exuberance.’ The former is dangerous because of the knock on effects; the latter not so as knock on effects do not exist or are minimal.

In my mind he seems to be assuming a closed system and a starting point of a ’steady state equilibrium.’ If one is in a closed system experiencing an equilibrium, then financial actors gravitating toward an asset class without borrowing must be selling something else to fund their activities. Prices will realign until there remains no marginal buyer of the appreciating asset at the expense of selling the depreciating asset. If the misalignment was truly pushed to bubble proportions, we would merely have a realignment of value and wealth with little dislocation when the bubble ‘bursts.’ The bubble only becomes worrisome if it arose from leverage which, when the bubble bursts, must be dissipated and may form a cascade of descending values as it unwinds.

A steady state equilibrium does not appear to be the current case. We are operating in what appears to be an overlevered state which is attempting to realign. Even a benign ‘irrational exuberance’ bubble here may generate knock on effects when it bursts. Furthermore, to assume the US and Europe are a closed system and thus impervious to bubbles elsewhere, say China, seems extremely nearsighted. It is not merely the size of the US that caused the worldwide contagion; it is the interconnectedness of the financial and economic systems as well. Over a decade ago we learned that even seemingly inconsequential economies such as Thailand could exert significant worldwide negative externalities when bubbles burst. China is not inconsequential, nor are some of the other potential sources of bubbles. The absence of an equilibrium and existence of ongoing deleveraging would make the impact of a burst leveraged bubble whatever the source seem even more consequential.

Finally, I think Mishkin misses another point. He believes we cannot be creating a leveraged bubble because we are deleveraging in the US and certain other countries. This misses the point that much, if not all or more, of the private sector attempt at deleveraging is being counteracted by massive public leveraging. This leverage in certain instances, think TALF, PPIP, and the Fed buying mortgages is directly countering private deleveraging and leaving the state of the markets far from truly repaired. More ominous, other bubbles may be created in other areas as some of the government induced liquidity seeks other avenues of return.

In all, I think Mishkin is far too sanguine.

well- i guess as long as the banks are ok-

that’s all that matters-

all other bubbles- well . . . who cares- as the bank’s balance sheets aren’t impacted

I’m troubled.

Jeff
http://www.cerebellumblues.com

How pathetic.

Claiming that this ongoing bubble is lacking in credit completely ignores the infinite credit provided directly by the Fed and indirectly by driving interest rates to zero by diverting savors money to super risky search for yield.

That a person with such poor intellect and common sense can be a professor and a FED governor is the best indication of the basic disintegration of meritocracy in this country.

Poor USA.