Matthew C Klein, Columnist

Is the Only Choice Bubbles or Recession?

The smartest economists are telling us that endless cycles of bubbles are the only way out of the current malaise. There may be a better way.

November 19, 2013 at 4:28 PM UTC

By Matthew C Klein

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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The Onion, a satirical newspaper, ran one of its best headlines ever in July 2008: "Recession-Plagued Nation Demands New Bubble to Invest In." More than five years later, this joke resembles a serious suggestion from several of the world's leading economists. That would leave us with an unappetizing choice between the excesses of the go-go years and chronic slow growth and underemployment. Fortunately, there may be an alternative -- if we're willing to do something about wealth and income inequality.

During a presentation at the International Monetary Fund's most recent economicforum, Larry Summers, the former Treasury secretary, argued that we should be concerned about policies "whose basic purpose is to cause there to be less lending, borrowing, and inflated asset prices than there was before." To economist Paul Krugman, what Summers seemed to be saying is that tougher financial regulation "may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy." It's a view that Krugman endorses and is reminiscent of his suggestion in 2002 that the Fed engineer a housing bubble to offset the collapse in business investment.