Quote of the Day: We Are Doomed to Financial Bubbles Forever

| Sat Jan. 5, 2013 8:50 AM PST

John Quiggin writes that he believes the study of macroeconomics went off the rails in 1958, when the Phillips curve was invented. He's not even very impressed with the success of the Taylor-rule style interest rate targeting that gave us the Great Moderation between the late 80s and 2008:

Implicit in this view is the idea that the Great Moderation was a policy success and that the subsequent Great Recession was the result of unrelated failures in financial market regulation. My view is that the two can’t be separated. In the absence of tight financial repression, asset price bubbles are regularly and predictably associated with low and stable inflation. Central banks considered and rejected the idea of using interest-rate policies to burst bubbles, and the policy framework of the Great Moderation was inconsistent with financial repression, so the same policies that gave us the moderation caused the recession.

On this view, it sounds like we're just well and truly screwed, since a Bretton-Woods/Regulation Q version of the economy isn't coming back anytime soon. I don't know if John is actually right about this, but it seemed worth tossing out for discussion. If he's right, what's the answer?

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