Keynes (quoted by DeLong) on Liquidationism

Brad DeLong digs up a nice quote from Keynes, which makes a point similar to what I was trying to argue here, here, and here. I can't claim that the recent US housing boom was either quite as benign or quite as productive as the investment boom of the late 1920s, but the same general principle applies. The behavior of investors in the late 1920s appeared quite reckless in immediate retrospect, but they obviously did more good than harm (or at least, the great harm that resulted indirectly was only because of subsequent bad policies). And we do now, of course, have to be concerned about the risk of inflation, which was not (or shouldn't have been) an issue in the early 1930s. But the idea that speculators have to be severely and broadly punished by the monetary authority for taking excessive risks -- that idea, I contend along with Keynes, is foolish. It is very hard to distinguish which speculative actions were ex ante prudent and/or valuable and which were excessive. It is (as the Fed now clearly realizes) not the job of the central bank to make such judgments after the fact (or, except in its regulatory role, before the fact). The mandate is for high employment and reasonable price stability, and it is not desirable that the mandate should be broadened to include assuring the right incentives for speculators.