Comment of the Day: Robert Waldmann: Reaching for Yield: “I have read your Bean excerpt which is very brief…
…It seems to me that the allegation of a low propensity to invest must refer to NIPA investment, that is choices by managers of firms (including housing developers). This is what would employe Chinese savings. In contrast, bubbles don’t have to involve NIPA investment. A Bitcoin bubble causes only a little investment in computers to find roots of the Bitcoin has function. I think Bean’s problem is: if the bubble has no effect on national accounts when going up (and so doesn’t cause higher interest rates), then it is hard to make a model in which it has a large effects when it bursts. I agree Bean has a problem.
I think it isn’t too hard to detect a reach for yield. Such a reach should cause reduced risk premiums. I type (as I often do in this box) about corporate bond spreads. They are easy to look up. They aren’t unusually high (so no evidence of a still disrupted financial system) nor are they unusually low (so no sign of a reach for yield).
I too feel a model might be useful (yes we, you and I, agree on that — what is the world coming too). In particular, I want to know when people are talking about:
(1) Indeterminacy and totally rational bubbles which might or might not burst,
(2) Irrational bubbles which must burst (Ponzi has an easier task if r is low), or
(3) The zero lower bound on the deposit rate (assuming banks can’t charge fees as my banks do) which implies real effects of a low safe nominal interest rate (especially if one also assumes a zero lower bound on profits which bankers can report without losing their jobs).
This is an important distinction, because problem 3 can be handled (without high unemployment) if there is a higher target inflation rate.