The second strategy, which has dominated U.S. policy in recent years, is lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to ensure financial stability. No doubt the economy is far healthier now than it would have been in the absence of these measures. But a growth strategy that relies on interest rates significantly below growth rates for long periods virtually ensures the emergence of substantial financial bubbles and dangerous buildups in leverage. The idea that regulation can allow the growth benefits of easy credit to come without cost is a chimera. The increases in asset values and increased ability to borrow that stimulate the economy are the proper concern of prudent regulation. [Bold added.]
I have two reactions:
(1) Remember a few months ago when I said that Larry Summers (and Krugman, who was jokingly accusing Summers of plagiarism for taking Krugman’s position) was confirming the Austrian position, and some of you clowns denied that they said low interest rates lead to bubbles? Well, I hope you email Summers and tell him he just misrepresented himself.
(2) Summers and I agree on the positive question: The string of bubbles in recent decades is due to the textbook policy response of the Fed lowering interest rates in response to a bad economy. We just disagree on the normative question: Summers thinks an economy going through successive bubbles is better (“far healthier”) than one spared a string of bubbles, whereas I hold the opposite judgment.