Tabarrok: QE doesn’t generate bubbles, it merely generates bubbles
August 28, 2013 12 Comments
Alex Tabarrok on ‘bubbles‘:
One point to bear in mind is that when interest rates are low even rationally determined asset prices may fluctuate wildly. [...]The lesson is that QE doesn’t have to generate bubbles to generate wide swings in asset prices it just has to lower interest rates.
Um. Ok! But: How does QE ‘lower interest rates’?
Let’s back up. What is an ‘interest rate’? For QE does not involve the Fed buying and selling ‘interest rates’. ‘Interest rates’, the ones we’re talking about, are not a direct market observable quantity or tradeable thing. Nor are ‘interest rates’ some sort of exogenous sequence of numbers handed down to us from the sky-gods. In a very real sense they are a set of phony numbers we construct from certain asset prices. And it is assets that the Fed buys, raising their prices, (not ‘rates’ that they ‘lower’), as part of their QE efforts.
So if Tabarrok thinks that asset-price swings are merely symptomatic of the Fed having ‘lowered interest rates’ via QE, another way to say this is that he thinks the Fed has raised the price of certain assets via QE (a side effect of which is that the ‘interest rates’ we back out of those prices go down), leading to inflated prices in those assets (and possibly, by the exact argument Tabarrok gives, large price-swings in other assets).
Which is exactly what people mean by ‘bubble’ if they mean anything.
I’m not here to say there is or isn’t a ‘bubble’ or that if there is, the Fed has caused it with QE. I’m not even sure ‘bubble’ can be defined precisely or is all that meaningful. But it’s striking that add it up and Tabarrok has written a blog post debunking the idea that QE is necessarily causing bubbles, by stipulating that from available evidence it’s possible they’re merely…causing bubbles. Well hey. Who can argue with that?