An excellent post over at Marginal Revolution on this. The points raised are:
1. If a more expansionary monetary policy helps an economy recover, yes it may well raise the risk of a later bubble. We should then be cautious, but that is no reason to turn down the prospect of a recovery. Anything leading to recovery could have a similar risk.
2. There are already plenty of reserves in the system and there is plenty of room for credit to expand over its current level. Maybe we don’t know what triggers bubble-inducing investment behavior, but why should raising ngdp expectations and realities raise the risk of a bubble, if not for the factor cited in #1?
3. Arguably a flat yield curve induces a quest for higher returns elsewhere or in more dubious investment areas. Yet the flattening yield curve did not follow quickly from the massive injection of reserves. Rather it evolved slowly as prospects for real recovery deteriorated and the long-run outlook for the advanced economies turned down. Real factors drove the flattening, and if monetary expansion brought a bit of recovery it likely would unflatten that curve a bit. That could well lower the risk of a bubble.
4. I may consider Austrian theory, with regard to this question, in a separate post.
There are two points I would raise here though.
With regards to bullet three – although I agree that the flat yield cuve is likely the result of weak prosepects for the economy, we can’t really pretend that the long end of the yield curve is currently independent of relatively direct government involvement. The Fed’s willingness to buy up longer term Treasury bonds in order to stimulate growth could indicate that the low yield curve is partially the result of intervention, rather than true expectations of long term inflation and growth propsects.
Interestingly, I agree with bullet point three – I think that if there were sufficient asset purchases we would actually see the yield curve steepen (through its impact on expectations). But this is clear, or necessarily the mainstream, view of what is going on.
The second point is that bubbles aren’t necessarily bad – in any sense of the word. They transfer resources between groups, groups who chose to take risk. They lead to a change in the timing of investment, often in a way that is suboptimal – but not disasterous. A “bubble” in of itself doesn’t lead to a failure of monetary policy, and it doesn’t lead to a large scale downturn – there are other significant factors that have lead to these things internationally, factors that were correlated with the bubble (maybe even related to it) but not caused by it!