bubblicious emerging markets

This would not be surprising to those who have read Krugman's 1999 book The Return of Depression Economics.

Generation B (For Bubble) by Krugman

So, the flood of money into emerging markets now looks in retrospect like another bubble. For the moment, I don’t see a good reason to believe that the bursting of this particular bubble will be catastrophic — what made the Asian crisis of 1997-8 so bad was the high level of foreign-currency denominated debt, and that seems less of an issue now. In fact, the main danger, as Ryan Avent says, seems to be policy overreaction: countries raising interest rates to defend indefensible exchange rates, leading to unnecessary slumps. But I have to admit that I’m less certain than usual about my diagnosis, because I’m still coming up to speed on the Indian economy in particular. 

Here, however, is a side question: why have we been having so many bubbles? 

The answer you hear from a lot of people is that it’s all caused by excessively easy money. But let’s think about the longer-term history for a bit. Here’s long-term U.S. interest rates since the early 1950s: 

 

As you can see, there was a period of very high rates in the inflationary 70s and early 80s. Rates fell after the Volcker stabilization, but they stayed relatively high by 50s/60s standards through the late 80s, the 90s, and even for much of the naughties. 

Now, the thing you need to realize is that the whole era since around 1985 has been one of successive bubbles. There was a huge commercial real estate bubble (pdf) in the 80s, closely tied up with the S&L crisis; a bubble in capital flows to Asia in the mid 90s; the dotcom bubble; the housing bubble; and now, it seems, the BRIC bubble. There was nothing comparable in the 50s and 60s. 

So, was monetary policy excessively easy through this whole period? If so, where’s the inflation? Maybe you can argue that loose money, for a while, shows up in asset prices rather than goods prices (although I’ve never seen that argument made well). But for a whole generation? 

So what was different? The answer seems obvious: financial deregulation, including capital account liberalization. Banks were set free — and went wild, again and again.