Bubbles ‘R’ Us

Many economists have wondered if Benjamin Strong, the powerful and savvy head of the Federal Reserve Bank of New York, hadn’t died in 1928 would he have managed to prevent the recession from turning into a depression. Anyway, there is a nice passage about Americans and speculative bubbles from Strong in “The Lords of Finance” by Liaquat Ahamed.

“In Strong’s view, something about the American character–the exuberance, the driving optimism, the naive embrace of fads–lent itself to periods of speculative excess. ‘It seems a shame that the best sort of plans can be handicapped by a speculative orgy,’ he mused almost philosophically to Norman [the head of the British central bank] at the end of 1925, ‘and yet the temper of the people of this country is such that these situations cannot be avoided.'”

He’s right. The downside should be limited or contained when the bubble bursts, but bubbles also reflect innovation and optimism, the belief that tomorrow will be better than today.