Obama’s Cure for Financial Bubbles

A recent article on Politico‘s website reveals President Obama’s fundamental lack of understanding of the nature of a financial bubble:

…[W]hat Obama rarely says about ending the “cycle of bubble and bust” is this: He’s prepared to intervene to make sure that kind of red-hot growth doesn’t occur. And he’s willing to do it with added government regulation if needed to prevent any one sector of the economy from getting out of balance –- the way the dot-com boom did in the 1990s and the real-estate market did earlier this decade.

According to Austan Goolsbee, a key Obama economic adviser, the president plans to focus on stopping bubbles along with preventing busts. And in an interview with POLITICO, Goolsbee said the administration will be on the lookout for new bubbles, like the tech stocks or housing prices. If new threats are spotted, he said Obama would use “regulatory oversight to prevent guys who want to make a quick buck from doing real harm to the economy. … That is what it means to get out of the bubble-and-bust cycle.”

The president seems to ignore the role of monetary policy and the manipulation of interest rates in creating these bubbles, and is under the impression that all it takes is a little “regulatory oversight” to completely terminate the boom-bust cycle. This type of economic illiteracy is astounding. The article concludes with a breath of fresh air from our friends at the Cato Institute:

Free-market-oriented economists argue that the government has no business picking winners and losers in the economy. After all, stopping a bubble at any point unavoidably hurts certain investors.

“One man’s expansion is another man’s bubble,” said Dan Mitchell, a senior fellow at the libertarian CATO Institute. “I have a lot of doubts about the administration’s ability and willingness to solve booms and busts,” he said. “And I’m worried that it reflects an ideological hubris that the economy can be planned.”

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