1) Bubbles are not necessary – they are unanticipated consequences of rapid growth. We should try to control them.

2) In the expansion from 1997- 2007, the real goods were produced mostly outside the U.S. As a result, the ability to produce real goods exists outside the U.S. This leaves the U.S. in a doubly vulnerable position – lack of habits and tools producing goods and a negative Net International Investment Position.

Sorry, that’s supposed to be More Good Than Harm.

Excellent point. In fact, the case can very easily be made that “bubbles” (usually rapid and excessive credit expansion and/or asset valuation) do much more harm than good, even with the subsequent (and inevitable) “crashes.”

The classic 17th and 18th century “tulip” style bubbles and trading company/land office schemes actually allocated capital for the early industrial revolution and the settlement of North America by Europeans. The period from 1908-1929 saw a fantastic second industrial revolution and technological explosion, and the 1939-2005 period has also been remarkable, especially on a global scale.

In every major historical international “bubble” scenario the resultant “crashes” of credit, asset values and/or business activity are from peaks that were extremely high compared to pre-bubble levels, and the net post-bubble level is ALWAYS higher than the initial conditions (e.g., in order to understand the net effect of the full cycle, you wouldn’t compare 1933 to 1929, you’d compare 1933 to 1908).

Moreover, as you point out, you get all the residual tangible benefits of industrial, commercial, and technological expansion that accelerated during the “bubble” phase (by the way, war, if you’re not physically destroyed by it, can the best “bubble” of all in this regard – e.g., WWI and WWII for America).

Of course, there is always the “rachet effect,” wherein expectations of prosperity reached at the bubble’s peak resist being replaced by a feeling of gratitude for the gains achieved during the bubble, with acceptance of the necessary partial reduction of the previous hyper-prosperity, even when the reduction is by fractions of less than 50%.

But, this is merely evidence of our psychological rigidity, not evidence that the “bubble” itself did any material harm (although arguments are made concerning “misallocation of capital” that I would agree with). For example, you get bizarre recommendations to “bulldoze the excess housing” to reduce capacity so prices will rise. I believe that increased housing stock is one of the BENEFITS of the credit bubble! In fact, housing is still overpriced, or it would be selling better – and it’s still twice the price it was in 1999 (when equities were higher priced than they are now).

I have a nude Alan Greenspan poster in my bedroom, created by Don Luskin, and produced by Kudlow & Co.

Don’t sell capitalism short. It’s illegal !!!!!