Dean Baker: Bubbles are Not Funny: The 99% Gets Blasted When They Burst

November 18, 2013  |  Paul Krugman tells us [3] that Larry Summers joined the camp concerned about secular stagnation in his I.M.F. talk last week, something that I had not picked up from prior coverage of the session. This is good news, but I would qualify a few of the points that Krugman makes in his elaboration of Summers' remarks.

 

First, while the economy may presently need asset bubbles to maintain full employment (a point I made in Plunder and Blunder: The Rise and Fall of the Bubble Economy [4]), it doesn't follow that we should not be concerned about asset bubbles. The problem with bubbles is that their inflation and inevitable deflation lead to massive redistribution of wealth.

In the case of the housing bubble in particular we saw millions of people lose much or all of their wealth from buying homes at bubble-inflated prices. The loss of housing wealth is especially devastating because housing is a highly leveraged asset even in normal times and it is an asset often held by middle and moderate income households. It was great that the bubble was able to spur growth and get the economy close to full employment, however the subsequent crash was pretty awful. It would be incredibly irresponsible to go through another round like this.