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Normally I find the material from the Peterson Institute of International Economics to be high caliber, but this op-ed by Subramanian and Williamson, two senior writers from the Institute, strikes me as a bit fishy.

The authors take issue with the view that asset bubbles (of the kind that we saw in the US housing market) should be left to inflate and pop on their own. According to this line of argument, policymakers cannot know in advance when a bubble is forming, or at what point it has reached its peak. Instead, they should focus on creating an environment where these price fluctuations will not have such strong adverse effects. In other words, it's not up to government to prick the asset bubbles, but to soften the blow if one should burst.

The authors put forward the following, rather blunt, declaration:

However, the wreck that is today’s financial system is testimony to the catastrophically flawed nature of that doctrine. Policymakers have no choice but to have a view on what constitutes a reasonable or equilibrium level of all asset prices. (emphasis added)

They go on to recommend that governments set "zones" within which fluctuations will be tolerated. How big are the zones to be? It depends. Are these zones to be national or international? It depends. What sort of policies would you use to contain price fluctuations? It depends. Are you suggesting that we return to that era in the 1970s when members of the government sat down every week to decide the price of milk? No. Well, maybe.

I'm not sure which is more galling, the very principle of the thing they're suggesting or their complete disregard for the practicalities involved. Because if they're willing to set zones for the prices of assets like housing, oil, and carrots, why not also set zones for prices on other things, like your salary - your wage is, after all, the price of your labour. Now, you might argue that the Obama administration has done just that. But even the latest decision to cap banking execs salaries at $500,000 applies only to those banks who are applying for public bailout funds. Geithner is not crazy enough to apply that to the economy as a whole.

But even if you're sympathetic to the idea of creating price zones for all assets, how on earth would you pull it off? OPEC has enough trouble coordinating oil prices and they represent less than half of the world's oil-producing capacity. What would happen if you tried to do the same thing with rice? Similarly, countries often try to set "zones" for a particular type of asset: their currency. But recent history is filled with examples of the failure of such attempts - sometimes with catastrophic results for the economy.

While I sympathize with the authors' sentiments, I think they've taken things too far. I agree that, in the case of the US housing market, there was a clear bubble and steps should have been taken to discourage, rather than encourage, such widespread financial irresponsibility. But to suggest that the government establish a reasonable price range for every single asset strikes me as ridiculous. This range is either going to be too restrictive to allow for normal price adjustments, or so wide as to be practically irrelevant.

It also seems to ignore the lessons from previous (failed) attempts by national governments to fine-tune their economy. I suspect this column is what happens when intellectuals who are paid to produce good ideas on a regularized schedule occasionally come up with a pretty bad one instead.