I am really swamped with work stuff so I can’t do this justice. But I couldn’t ignore this recent Scott Sumner post at EconLog, in which he asks, “If you believe in bubbles, then why are you a libertarian?” Here’s his argument:
I don’t believe in bubbles. In addition, I’m a libertarian. I see those two facts as being related. If asset markets are efficient, then the case for government intervention is weaker…
Here’s what I don’t understand. I often talk to libertarians who seem to see bubbles all over the place. But this implies that markets are not pricing assets at the proper level. Often this will be attributed to outside factors such as monetary policy. It would be like excusing inefficiency in soybean pricing by pointing to the fact that it was windy and rainy last week…
If markets are not efficient when monetary policy is off course, there is absolutely no reason to assume that [markets] would be efficient when monetary policy is not off course. Inefficiency results from irrational pricing, it’s either a problem or it isn’t. People don’t become irrational just because the fed funds rate is set at 2% rather than 3%. Either markets are irrational or they aren’t.
If they are irrational, then the case for government intervention is much stronger.
For brevity I took out some of his caveats and nuances, but that’s definitely his argument. Here are some responses:
==> The most obvious one, which people in the comments harped on, is that government regulators are no more likely to get it right than private investors. However, even though it’s important to make that point, I think it doesn’t take on Scott’s argument directly. He actually acknowledges that point, and claims he just means that the case for markets surely is weaker if we admit markets are often prone to bubbles.
==> Why does Scott continually claim that efficient markets would rule out bubbles? At NYU we studied formal models–where all the agents obeyed Bayes’ Law and had rational expectations in Lucas’ sense–where there could be “informational cascades” and thus herd behavior. The intuition is that people have private signals that are noisy, and they observe other people’s actions to gain more information. If it just so happens that the first few people get a “buy” signal even though the asset is a dud, then each subsequent agent–even though most of them will get a “don’t buy” signal–will look at the string of buyers and conclude that his or her own signal is faulty. So you can get a whole population buying an asset even though if you polled them, collectively their aggregate information knows that the asset is a dud.
Extending that idea, I never published it but I wrote up a model one time dealing with the popular “rational expectations” objection to Austrian business cycle theory. If you view market prices as providing noisy information to investors, and if you think the Fed intervening will make the signal noisier–even though investors act perfectly rationally to compensate for Fed policy–then it is pretty straightforward to build a Chicago-Approved model where you get more booms over a period of time with Fed intervention.
==> There is a whole tradition in classical liberalism and modern libertarianism of people who actually believe humans have natural rights, and that it is immoral to violate someone’s rights. Not everyone is a crude utilitarian.
==> I wonder too why someone who is in favor of a carbon tax (can’t find good link but he is), 80% consumption tax rates on rich people, who thinks that if Republicans delayed a 40% surtax on employers who offer expensive health insurance policies it proves they don’t like poor people, who really wants to be able to support a federal Guaranteed Annual Income but just can’t get the numbers to work, who jokingly refers to his preferred policies as debasing the currency, and who proposes a single-payer health care system for catastrophic medical expenses…calls himself a libertarian? Seems to be a lot more strikes than someone who believes asset prices can be in a bubble when the Fed floods the markets with trillions of dollars.