Got It Wrong? WSJ Op-Ed Page Has a Spot for You

The Wall Street Journal editorial page saw fit to print an op-ed from Donald L. Luskin today about how the Federal Reserve shouldn’t try to prick bubbles because it’s impossible to tell you’re in a bubble until it’s too late, and anyway raising rates doesn’t work.

Now, Luskin isn’t exactly known for getting things right. He was the sage who wrote the Washington Post op-ed last September titled: “A Nation of Exaggerators: Quit Doling Out That Bad-Economy Line.” The very next day Lehman Brothers went bust sending the already terrible economy into near collapse. One representative quote: “Things today just aren’t that bad.” This as millions of people were losing their homes.

In that column, Luskin also said house prices had “clearly… started to recover,” that the crisis was over, and that there was no recession—ten months after it had started (though to be fair that wasn’t officially declared for three months). The next day, Luskin advisee John McCain made his infamous “fundamentals of our economy are strong” gaffe.

Today, the Journal lets Luskin write this:

He notes confidently, by way of example, that “the housing bubble in the United States had been identified by many by 2005.” Well, that’s true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices.

If the housing bubble hadn’t burst, the “many” who identified it in 2005 would have been wrong. The reality is that at all times in markets there are multiple opinions. There can be no assurance that those who hold the correct ones about what is or is not a bubble will end up at the Fed, where they can make prescient policy decisions.

First of all, it’s perfectly inane to say “if the housing bubble hadn’t burst, the ‘many’ who identified it in 2005 would have been wrong.”

Second, “government control of asset prices” is an intellectually dishonest characterization of what New York Fed Chairman Dudley is saying. He’s talking about putting the brakes on speculative manias, in a manner much like the Fed does when it sees the economy overheating. That involves raising interest rates or, perhaps, changing regulatory requirements for leverage and margin, making it less profitable (and less dangerous) to speculate. It has nothing to do with setting prices.

But the real issue here is that Luskin is covering for his own failures by sniping at those who were right about what was obviously a housing bubble. He pooh-poohed it well beyond the point where it was reasonable to have been wrong.

As late as July of 2007 he still was belittling the housing bubble as the “so-called collapse of the so-called housing bubble” (in a column exhorting investors to buy stocks when the Dow was at 13,472). The housing bubble had begun deflating a year earlier.

What Luskin is saying in his Journal column today is that the people who were right about the housing bubble (and it’s not like they were some tiny secret club), who looked at the data with a clear head and not through rose-colored Wall Street glasses at the data—who stood back and said wait a minute, something’s screwy here—those guys were the proverbial broken clock right twice a day.

I don’t think so. Just because somebody has to be right doesn’t mean you didn’t blow it for missing the obvious.

So Luskin’s got a dog in that fight. That should have been made clear.

But that’s not all that’s wrong here. Luskin can’t even have the debate on fair terms, a sure red flag:

Second, Mr. Dudley’s claim that the housing bubble had been identified in 2005 is a red herring, because by then the bubble was already well advanced (the peak in home prices came in May 2006). To do any good, the Fed would have to identify bubbles before they even happen.

Hello, straw man! Nobody thinks anyone can “identify bubbles before they even happen.” Dudley’s point is to try to stop them from getting even bigger so they do less damage when they pop.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.