Paul Krugman: This Age of Bubbles

Why have so many bubbles emerged around the world in recent decades?:

This Age of Bubbles, by Paul Krugman, Commentary, NY Times: So, another BRIC hits the wall. Actually, I’ve never much liked the whole “BRIC” — Brazil, Russia, India, and China — concept: Russia, which is basically a petro-economy, doesn’t belong there at all, and there are large differences among the other three. Still, it’s hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour.

What’s going on? It’s a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. ... As a result, India’s rupee and Brazil’s real are plunging, along with Indonesia’s rupiah, the South African rand, the Turkish lira, and more.

Does this reversal of fortune pose a major threat to the world economy? I don’t think so (he said with his fingers crossed behind his back). ...

Still,... this latest financial turmoil raises a broader question: Why have we been having so many bubbles? ...

The thing is, it wasn’t always thus. The ’50s, the ’60s, even the troubled ’70s, weren’t nearly as bubble-prone. So what changed?

One popular answer involves blaming the Federal Reserve — the loose-money policies of Ben Bernanke and, before him, Alan Greenspan. ...

But the Fed was only doing its job. It’s supposed to push interest rates down when the economy is depressed and inflation is low. And what about the series of earlier bubbles, which ... reach back a generation? ... Besides, isn’t the sign of excessive money printing supposed to be rising inflation? We’ve had a whole generation of successive bubbles — and inflation is lower than it was at the beginning.

O.K., the other obvious culprit is financial deregulation — not just in the United States but around the world, and including the removal of most controls on the international movement of capital. Banks gone wild were at the heart of the commercial real estate bubble of the 1980s and the housing bubble that burst in 2007. Cross-border flows of hot money were at the heart of the Asian crisis of 1997-98 and the crisis now erupting in emerging markets — and were central to the ongoing crisis in Europe, too.

In short, the main lesson of this age of bubbles ... is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis.