What central banks should do to deal with bubbles? Should they tighten their monetary policy? Should they loosen it? Should they become extra cautious? Is there some place for the banks to actually not do anything?
The main point and the most important to note from the classical economists is not to intervene. All these econometric models assume that the central banks and the governments know what they are doing. The best path isn’t to find a better way to manage things, but rather to eliminate government and central bank intervention that has lead to failures time and again.
Sweden had very little deficits. They were adept at balancing their budgets. The current lower interest rates are going to cause another bubble sooner or later. Just keep an eye on Sweden and give it some time. All this central bank manipulation is just a waste. What is necessary it have the fiscal and monetary policies to be abolished.
There’s a natural rate of interest that exists in an economy. This is not set by the government, but is based on expectations and the savings. When savings are higher, the saved funds automatically lead to reduced rate. For some weird reason central banks destroy this very idea of saving by lowering interest rates and forcing people into higher risk investments or consumption. One may need to read Hayek or Mises to understand this.
Why is it that lowering prices cause panic in the minds of mainstream economists? Aren’t the computer prices going down? Does that mean computer companies are going out of business? Isn’t that lowering of price in goods making it easier and more accessible for people to get more and better quality goods? Lowering prices also mean productivity gains. As long as prices are not artificially hampered from moving the markets adjust and clear.
The world is moving more and more towards government control of each and every facet of free market. People are erroneously made to believe it was the capitalist who is to be blamed for this. What no one cares to tell you is that if the government stays out of it the same capitalist will go out of business if he doesn’t make prudent decisions. It’s by bailing out the imprudent, and preventing the market from punishing him is what leads to more problems and bigger busts down the road. So what central banks should do to deal with bubbles? Simply put, they should do nothing.