[danmelnick]

My understanding is that bubbles form when money is cheap and is chasing returns. If interest rates went up and/or the money supply was dampened and people had incentive to not chase returns in markets like tech, a bubble would be less likely to form.

That said, the psychology of bubbles is difficult to stop once it gains momentum.

The problem is that an entity like the fed doesn't have better information than the markets about appropriate asset pricing, so attempts to dampen bubbles might turn out to be premature or ill advised.

That's my $.02, I'm not a trained economist, just an armchair observer.

[smokeyj]

In a way, most economists are armchair observers. Economists don't have "practice" economies in which theories are testable -- we ARE the test dummies. It's unfortunate they run the same experiment over and over: http://en.wikipedia.org/wiki/Hyperinflation

[orijing]

That's a misconception. Real economics (stuff beyond the Macroeconomics 101 you took) is about data as much as any of the other hard sciences. Take a look at http://d2o7bfz2il9cb7.cloudfront.net/main-qimg-7395f945e270f...

Economics PhD applicants score almost as high in the quantitative component of the GRE as their counterparts in mathematics and physics. That's because math and statistics are crucial to modern economics.

That's why there's a whole field of statistics named after economics: http://en.wikipedia.org/wiki/Econometrics

[smokeyj]

You missed my point. I'm arguing theorizing around statistical data is only half the battle to the scientific equation. The other part is putting those theories to the test and quantifying the results in meaningful way over time. Again and again. Without the again-and-again part, you only have theoretical knowledge. Theoretical knowledge is not a "hard science". Involving data does not make a hard science. Applying heuristics to the data does not make it a science. A computerized model does not make something science. The weather-man uses science when developing a forecast. The forecast is not a hard science.

Take minimum wage for example. This is a theory with supporters in both camps - some for, some against. Well, how can we ever measure if a minimum wage is having a positive influence? How can we continue in support of a theory with no supporting evidence? Pile on 500 more concurrent theories, and you have a cluster-fuck only Krugman could defend.

[ignifero]

Sadly there's a lot more to economics than econometrics, or else banks would be run by bots.

[dataminer]

Regarding the cheap money, isn't it better for markets to decide the interest rate rather than the Fed? Are there any examples in history where a country left the interest rate to be set by the market.

[orijing]

It's still the market that decides the interest rate. The Fed simply adjusts the money supply by buying or selling short term securities (historically) in order to create or soak up liquidity. The interest rate that results from these "Open Market transactions" are what you hear. The focus on short term securities means that in the long run the supply of money is still private-market driven.

There's an increased focus on affecting the medium-term or longer-term interest rates through the purchase of toxic assets like mortgage backed securities.

Not sure if that answers or clarifies anything though. I can say more if you're interested.

[meric]

http://en.wikipedia.org/wiki/Monetarism

Monetarists believe in controlling the money supply rather than interest rate. Is that what you're looking for?