Bubbleheads, by Paul Krugman: I was searching for unrelated material, but ran across this oldie but goodie from Jim Cramer:
As Toll Brothers (TOL - commentary - Cramer’s Take) cruises through $100, it’s time to hold the bubbleheads accountable. Who are the bubbleheads, in my book? Those are the people who have told you to bet against housing and to be worried about the speculative boom in homes.
Here’s where I am coming from. All day, I listen to and read people who say that housing’s got to roll over, that these companies can’t work, that it is just a matter of time. Then I look to see what’s been outperforming these stocks. Is it drugs? I don’t think so. Financials? Nah. Techs? Nope, not at all. Now I want to know when those who have warned us incessantly or told us it can’t last will get their comeuppance.
One question I’d like to answer, but haven’t had the time to research, is this: of those who condemn fiscal stimulus and demand that the Fed start raising rates now now now, how many denied that there was a housing bubble when it was actually inflating?
Here is Ellen McGrattan and Edward Prescott in 2000 telling everyone not to worry about a bubble in the stock market. They don't call them bubbleheads, but the message is clear:
...Is the current stock market value too high? Glassman and Hassett (1999) have argued that it is not. In fact, they have said that the market is undervalued by a factor of three. But others have expressed concern that the market is, indeed, overvalued. Federal Reserve Chairman Alan Greenspan (1996), for example, has suggested that the recent high value of the market may reflect “irrational exuberance” among investors. Shiller (2000) has reiterated this concern and said that a 50 percent drop in the value is plausible. ...
Conclusions Some stock market analysts have argued that corporate equity is currently overvalued. But such an argument requires a point of reference: overvalued relative to what? In this study, we use as our reference point the predictions of the basic growth model that is the standard model used by macroeconomists today. We match up all the variables in our model with the U.S. national income and product account data. We find that corporate equity is not overvalued. ...
Following up on Krugman's question, I'd like to know how many of today's budget deficit hawks were selling the false supply-side promise that tax cuts would pay for themselves as an excuse to cut taxes and open up a bigger hole in the deficit.