Are Speculative Bubbles Good?

Are speculative bubbles good for the economy? With much of the developed world still suffering the after-effects of the great housing and credit bubble, it might sound like a trick question. On Friday, however, at the annual conference of the Institute for New Economic Thinking, which is taking place in Toronto, I moderated a session during which several panelists suggested that bubbles can have an important upside: they help finance innovation and growth.

Having spent much of the past twenty years warning about the dangers of speculation, and writing two books about bubbles and their consequences, I felt a bit like Prince Charles presiding at a conference of contemporary architects. Nonetheless, it was an interesting discussion, and I thought it might be worth reviewing some of the arguments that were presented.

...read more