Krugman on Stockmarket Bubbles

Paul Krugman makes a great argument that the Fed shouldn't worry too much about stockmarket bubbles because their bursting doesn't cause the same excessive supply as bubbles in the real economy.

The thing to understand is that a stock market boom is not like a boom in physical investment--say, a boom in condominium construction. That kind of boom depresses future spending because it leaves behind a landscape littered with unsellable condos. But that isn't quite what happens when stocks surge: When the market value of Croesus.com doubles, that doesn't mean there will be an overhang of vacant dotcoms weighing down rental rates two years from now. It's paper gains today, paper losses tomorrow; who cares?

One thing that might potentially be an issue is indirect effects of stock markets on other parts of the economy but that's for future investigation. One other bit about the article that I found particularly interesting (and amusing) was the following mention of the dangers of excessive indebtedness:

Ah, they say, but what about debt? Shouldn't Greenspan act to counter the defaults that could accompany a market crash? If consumers go deeply into debt to buy stock or to buy consumer goods because their market gains make them feel rich, this could depress spending later on. But really bad debt overhangs come when businesses (especially real estate developers) overborrow, which is not, as far as I can tell, a big problem in America right now.

Incredible as this sounds now, it wasn't actually a lack of foresight because the article was written in early 1999 when levels of indebtedness had not yet reached the highs they did over the last 5 years.