This seems an awful lot like question begging to me. If we assume that the bad bubbles are caused by the Fed and the benign bubbles are caused by other things, then of course the Fed looks bad.
Replace qualitative words 'bad' and 'benign' with more quantitative words like 'large' and 'small'. Can we assume that large bubbles are caused (facilitated/encouraged) by the Fed while small bubbles
may be caused by other things? That would be question begging if it wasn't at least followed by a plausible explanation given for the assumption.
The
tendency for speculative bubble formation is part of human behavior and always exists, with or without the Fed. It is safe to assume that everyone wants to buy with the hope or expectation of later selling for a higher price than what they paid. If that tendency is what is meant by "cause" of the bubble, then the Fed is off scott free, because the Fed is not responsible for human attitudes, tendencies or behavior.
What we are asking, however, is not whether a tendency for bubble formation exists, but "What is the likelihood that the same housing bubble would have existed in the absence of the Fed"?
Here is where I liken the Fed to a drug manufacturer, with banks acting as dealers, neither of whom can be said to be responsible for the effects of drugs on a human being. Drug manufacturers and dealers don't "cause addictions". They only facilitate. Without a manufacturer and supplier, willing facilitators, some other mechanism would have to exist for the addiction to spread.
What we're really asking is whether an ordinary free market with sound currency, in the absence of a central bank, would have facilitated such a bubble. Would the interest rates have been
naturally low throughout the entire market, just as they were artificially kept low by the central bank? Would credit be
naturally relaxed throughout that market in the same way that they were artificially relaxed? Would banks have taken the same risks in the complete absence of the possibility of bailouts or guarantees by a lender of last resort, or government as a taxpayer-backed guarantor? While nobody can answer with absolute certainty, I think the common sense answer is a resounding no to all of these questions. A free (and fully accountable) market with ALL participants acting without safety nets of any kind, would have been naturally much,
much more cautious on the whole.
Of course, in a free market, privately accumulated capital (savings that isn't eroded away and taxed out of existence) would have been a viable competitor of funding from lending institutions. However, in each and every case, there would still be no bailouts, guarantees or other safety nets involved. If you're speculating on something as big as real estate, and knowing that a good portion of the market is only lending or spending what they actually have, the entire velocity of transactions would have been much slower, and far more cautious all around.
I am one of those who believes that wars and speculative bubbles would not have the same magnitude or the same dynamic at all were it not for central banking and a deliberately debauched currency. Not when people are transacting in what they actually have - and not just the easy access to promises, and promises of greater short-run returns based on near-future expectations.
That is where the lender of last resort point coincides with the money printing point for me. But that's only because I believe both are what give rise to the illusion that there is a safety net, which in turn emboldens, encourages and facilitates bubbles on magnitudes and scales that would not otherwise exist, regardless of human tendencies.
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