Interesting discussion in the FT Wednesday about a potential major shift in Fed philosophy: Maybe its a bad idea for Central Banks to passively wait for bubbles to pop. 

I am not sure if the Fed will shift away from the Greenspan doctrine: "Inflate Bubbles & Clean Up he Mes After." Will the change be to something less disruptive, or will they throttle the growth side of the equation? That’s the risk.

Perhaps one idea worth exploring might be not to not blow these bubbles in the first place.

Here’s an excerpt from the FT:

"The US Federal Reserve is reconsidering the way it deals with asset price bubbles in the wake of the housing and credit bust, in a move that could see the central bank using regulation – or even interest rates – to fight unjustified increases.

Top officials are re-examining the Alan Greenspan doctrine that central banks should not try to tackle asset bubbles and should focus on mitigating the fallout when they burst.

They are open to the possibility that the Fed may have to adopt a different strategy in future. However, they have not reached any conclusions and could end up reaffirming their traditional hands-off stance . . .

The Fed has long stood out among central banks as the least willing to embrace the idea that it should "lean against the wind" when asset prices are rising rapidly. Former chairman Mr Greenspan famously argued that it was in practice impossible to identify bubbles before they burst, and attempts to prick them by raising rates were likely to do more harm than good."

Greenspan has claimed its impossible to identify bubbles in real time; Ben Bernanke has been more contemplative on the subject. He’s said its "difficult" to know for sure when we are n a bubble.

Chairman, let me suggest a few data  points worth considering:

Standard Price Deviations: Is the asset class trading 2 to 3 standard deviations away from its traditional price metrics?

Inventory: Is there a huge inventory build? Bubbles create the incentive to produce a whole lot more, be it Miami condos or dot com companies.

Fundamentals: Has something shifted in the fundamental supply/demand equation that is impacting pricers, or is it pure speculation?

Regulatory Changes: Has the government altered some part of the equation that might have changed the game somewhat?

There are others, but these are a good beginning.

Note that the inventory metric is why I have doubted commodities are a bubble; also I have long claimed  that we did not have a national Housing bubble, but instead had a lending & credit bubble — a subtle but important distinction. 

By the same metrics, I agree with I agree  Stuart Hoffman, chief economist of PNC Financial, who notes that the enormous volume of new condos in Miami in inventory are just that proof of a local bubble (I agree).

>

UPDATE: May 16, 2008 5:42am

WSJ:

First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there’s a bubble in commodities.

But how and why do bubbles form? Economists traditionally haven’t offered much insight. From World War II till the mid-1990s, there weren’t many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like.

The dot-com boom began to change that. "You were seeing live, in action, the unfolding of lots of examples of valuations disconnecting from fundamentals," says Princeton economist Harrison Hong. Now, the study of financial bubbles is hot.

Marketwatch:

Fed should deflate some bubbles, Mishkin says 

The Federal Reserve should try to aggressively deflate some types of asset bubbles before they can harm the economy, Fed Gov. Frederic Mishkin said Thursday.

But raising interest rates isn’t the way to prick a bubble, he said. And some types of bubbles, such as the dot-com bubble of the late 1990s, probably shouldn’t be pricked at all, he said.

On the other hand, the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation to prevent widespread economic damage, Mishkin said.

The Fed should watch for bubbles that are associated with a fast expansion of credit, he said, because these bubbles have the potential to inflate bank balance sheets on the way up and destroy them on the way down.

>

Sources:
Fed looks at ways to fight asset bubbles
Krishna Guha
FT, Tuesday May 13 2008 18:05
http://us.ft.com/ftgateway/superpage.ft?news_id=fto051320081916203957

Bernanke’s Bubble Laboratory
Princeton Protégés of Fed Chief Study
the Economics of Manias
JUSTIN LAHART
WSJ, May 16, 2008; Page A1   
http://online.wsj.com/article/SB121089412378097011.html

Fed should deflate some bubbles, Mishkin says
Monetary policy ineffective, but supervision can break harmful feedback loops
Rex Nutting
MarketWatch, 7:04 p.m. EDT May 15, 2008
http://tinyurl.com/4wk673

Category: Commodities, Federal Reserve, Markets, Psychology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

52 Responses to “Policy Shift: Can the Fed Identify & Pop Asset Bubbles?”

  1. VennData says:

    What’s the biggest bubble to pop with this change in Alan Greenspan’s only contribution to Central Bank thinking? Greenspan’s un-deserved reputation for competence.

    Now that’s over with move on and defend the currency.

  2. Jim Haygood says:

    The Fed should examine its very reason for existence — the premise that central planning of credit expansion can add economic value. I believe that is flatly false.

    Do us all a favor, Ben — declare victory, fold tents, and march home. Thanks in advance, buddy.

  3. Flix says:

    The only conclusion that these bureaucrats will ever reach is for more regulation and more central planning of the whole banking cartel.

    The only thing they are considering is whether to be less “hands-off”. Guess what? They will decide that it is in the best interest of everyone if the “experts” are in charge.

  4. RichardN says:

    Now that we’ve had bubbles in RE, stocks, commodities, credit, emerging markets and treasuries; I think what the Fed is really trying to say, in its own perfect contrarian kind of way (ie “energy prices will moderate”) is that there is nothing left to have a bubble in. So sad.

  5. joe says:

    Repeat after me:
    “CENTRAL PLANNING DOES NOT WORK…”

    Isn’t that what all those free-market economists teach?

  6. m3 says:

    i don’t see this happening b/c the basis for all their actions is that the free market is this all-knowing spectre that reflects all information.

    if the market says a shanty house in florida is worth $700k, then it’s worth $700k.

    but common sense would say this is nonsense, but the free market says otherwise & is always right.

  7. joe says:

    M3,
    The market is just other people.
    If you can disagree with your wife about how much to spend on a car, or a house you can easily disagree with 5 million other investors. the question is not whether the price is right, but whether it is right for YOU. If you disagree with what shanties in Florida’s are going for don’t buy! If you think that the bank charges too much interest, don’t ask for credit!

    Bernanke, on the other hand, wants to decide prices for you.

  8. andy says:

    Sellers have their reasons to sell, buyers theirs… when prices have been going up for a long time and are going parabolic common sense says BUY.

    It takes experience and uncommon sense to go against the flow.
    It takes genious to pick the right time to do so.

  9. cinefoz says:

    BR said

    Note that the inventory metric is why I have doubted commodities are a bubble

    Reply: Given the way commodities are sold – via exchanges and contracts – and also given there is no competitive reason for anyone other than the end user to oppose higher prices, the inventory model for bubbles does not apply. The oceans of money flowing into this arena, none of which have any reason to want lower prices, invalidate your cause and effect assumption.

    Having said that, I would liken commodity price increases more to price fixing than to asset bubbles. Instead of a few people colluding in a small room or via email about cornering a market for widgets, big money is only constrained by it’s nerve in how fast to bid prices up, inviting other market participants along for the ride. There are no economic forces in play or available that could influence prices down. If one or more exist, please enumerate.

    The Hunt brothers tries to corner silver a couple of decades ago. Their mistake was not including all market participants into their scheme. Prices would have risen and nobody would have done anything to stop it.

  10. The models you need to predict an asset bubble in a subprime market post-FASB 157 are so simple that even undergraduate electrical engineers could have come up for some estimates for when the bubble would burst.

    If regulating price means avoiding things like FASB 157, it seems unambiguous that the Fed should take a larger role.

    In other news, aren’t Berkshire-Hathaways long-term puts another way to avoid bubbles that doesn’t require gov’t regulation?

  11. JustinTheSkeptic says:

    Cinefoz, well said.

  12. Jim Haygood says:

    $700k shanties in Florida were not a result of a “free market.” This aberration was produced by non-free market factors such as rapid currency depreciation and government-sponsored housing credit.

    During the gold-standard years from 1871 to 1900, real estate had a reputation as an asset that always declined in price. Since the advent of paper money in 1913, and GSE-subsidized mortgages in the postwar era, real estate has been systematically overvalued because it serves as an inflation hedge, though an imperfect one.

  13. Steve Barry says:

    Good job Jim…when I told the chief economist of a major investment firm 6 years ago that the Fed should be abolished, he looked at me like I had 7 heads. It’s ingrained in them all by now.

  14. brasil says:

    cinefoz ..excellent comment…I’d add the emotional environmental brainwash playing right into the manipulation..

  15. wally says:

    I do not see any possibility that the Fed can micrmanage to that degree – or any other government agency.
    However, the Fed should recognize that there is a normal cost of doing business and that money must have value – to have maintained the free-for-all during the house price run up was irresponsible. You cannot just give it all away and build a functioning economy. The Fed needs to target a rate that long-term experience says is workable and then get there as fast as possible. Any deviation should be very short term. Business cycles should be recognized and accepted.

  16. cinefoz says:

    Steve Barry,

    If oil and other commodities were not being priced at such stratospheric levels, I would be patiently waiting for S&P 1500 and beyond. The economy would grow slowly out of it’s other troubles.

    Given the pervasiveness of this organized crime and the bewildering tolerance for it by environmental idiots, there is no reason for the economy to grow and every reason for it to stagflate. Thus, my pessimism at this time.

  17. Ben Gordon says:

    To play devil’s advocate on commodities, most are 2 to 3 standard deviations from their long-term price bands, especially oil (our fund runs regressions). I struggle with whether this means it is a bubble as well, although it certainly indicates the asset class is not undervalued.

  18. gv says:

    “Perhaps one idea worth exploring might be not to not blow these bubbles in the first place”

    The bubbles inflate spontaneously in the market when the conditions are right. Anything the fed can do is at most just a part of those conditions. The fed doesn’t blow bubbles. If that were so, anytime they lower the interest rate a bubble should pop up somewhere.

    I’m afraid it’s not that simple. What could the fed do to stop the dot.com bubble from materialising? Investment world was full of enthusiasts who expected to gain 100% in half a year. They would not have cared if fed funds were at 15% – as opposed to the rest of the economy.

    As far as I know, bubbles have been around for much longer than the fed. Who was inflating them when there were no central banks? You can’t blame the fed for something that happened in the 17th century.

    So face it, there will be plenty of bubbles coming along in the future, no matter what Ben decides to do. Human nature will remain unaffected by the short term interest rates, as well as by regulation.

  19. Greg0658 says:

    I agree with wally “the Fed should recognize that there is a normal cost of doing business and that money must have value – to have maintained the free-for-all during the house price run up was irresponsible”

    The FED hyperdrove this economy for the 2000 to 2012 players at the expense of the future players. A cash power grab via derivatives. Creating a Wall Street Power Base of MUST play the game or loose out.

    I am ticked that pure stash cash in a bank savings pays next ta nothing. I am ticked cash pile pushing is a job, and beyond that, seemingly a well paying job.

  20. Mind says:

    “To play devil’s advocate on commodities, most are 2 to 3 standard deviations from their long-term price bands, especially oil (our fund runs regressions). I struggle with whether this means it is a bubble as well, although it certainly indicates the asset class is not undervalued.”

    Long-term price bands assume a fairly consistent demand/supply relationship. For commodities, especially oil, that is now changing, in a secular fashion, for the long-term.

  21. techy says:

    cinefoz….i hope u did not convert into a bear two months back..

    because your bullish strategy seems to be working fine, even though it does not make sense what has changed in the past two months that many stocks are back to their 52 week high levels…(AAPL, RIMM etc..)

  22. cinefoz says:

    techy,

    I bought in early enough to be in position to make money ytd several weeks ago. I ‘pressed the button’ and cashed out. I underestimated the emotional need for this market to continue going up even if it had no logical reason. Oil rising to $115 with conviction spooked me. Given the market at that time was oscillating at a plus / minus level for my situation, I decided to take my profits and wait for the next cycle.

    I firmly detest having to make the same profit twice by not selling on a timely basis. I’d rather take a smaller profit than risk a loss. I call this a maximize the minimum gain strategy. If oil had not risen so aggressively, I would have waited until I saw a huge fall in the morning markets, such as those last November.

    I think it is trading at a peak level now and will fall at some point in the near term. The bullish sentiment by the idiots now in the market will, hopefully, cause the next dip to be a quick one. I think it will drop to near January lows, but turn quickly. I’ll probably make 3 buys around that time, just to spread the timing risk.

  23. jkw says:

    It’s not very hard to identify bubbles. The only way you can have a bubble is if people are borrowing to buy something. The Fed can prevent bubbles by monitoring the overall leverage in asset classes. If they start noticing the leverage increasing too quickly, they can reregulate banks to reduce the amount of leverage available to the markets.

    The Fed could have prevented the housing bubble by forcing banks (and MBS writers) to only count mortgages as assets up to 80% of the home’s value. Very few banks would have been willing to write a 100% mortgage if it meant they had to book a 20% loss as soon as they wrote the note. The dot-com bubble would not have happened if stock margin requirements had been increased in 1999 (they were increased after the bubble had burst instead). It isn’t clear if oil is a bubble or not, but if it is the Fed could pop it by upping the margin requirement to 70% or higher for everyone who doesn’t take delivery on at least 2/3 of their futures contracts. That would cut out most of the speculators, leaving only the refiners and suppliers as the major market movers.

    Interest rates are a very crude tool. If you are going to target bubbles, you have to do it more directly.

  24. cinefoz says:

    BTW, late this year, if oil does not correct, I expect to see a whole new level of low in the stock market. Reality will catch up, eventually. It might drop to mid 2006 levels.

  25. Bruce says:

    Well, with the rise in unemploymentapplications again today, and the decline in manufacturing (another .7%, second .7% decline in 3 months) even the loudest bulls will have to realize that the housing crisis and energy costs will stop the growth of the economy here…and yesterday real wages were reported as dropping .5%…there is nothing I can see that wouldn’t make me want to just sit awhile and see where this is heading….

  26. just dug says:

    No matter what metrics they might use they would never raise interest rates or take other action to restrict credit expansion in a timely fashion. As Mises pointed out years ago it’s tantamount to admitting the “prosperity” they had been taking credit for was a fraud, and taking any action to pop a bubble means they will get blamed for the aftermath. It’s always easier to find a new era excuse to justify letting it rip.

  27. Ralph says:

    One more item for the list

    It is NOT different this time!

    On a more serious note.
    I am not sure that all the blame rests with the regulatory bodies. There is also a cultural component.

    Our leadership has has a somewhat wild west kind of attitude and there has been an unusual lack of anger. There has never been a push by the masses towards making our leaders and regulators accountable.

  28. flow5 says:

    You can’t miss bubbles. Monetary flows (MVt) is infallable. Anyone that wants to know how to do it can go to:
    http://fraser.stlouisfed.org/publications/bms/issue/61/download/125/section5.pdf

  29. michael schumacher says:

    It will never be the one to pop the bubble especially since it’s best customers benefit so greatly from the allowance of it to continue. At the very least the Fed is making quite a tidy profit just playing the loan shark game with the banks.

    Responsible policies in the first place would not allow one to grow into something that needed to be diffused. Until they start replacing poor decisions with sound meaningful policies we will never actually know what they are capable of.

    But they seem to talk a good game when they are outside the box…….that is the problem. BB said he knew nothing about BSC until March 13th…then why was he is a room with the largest gathering of bank ‘wonks’ discussing this before he claimed to know anything? That is just a small easy example of lying to the hilt. You can bet it’s done on a much larger scale…including data, testimony, and actual monies dispersed through the many ‘auctions’ they have had to create. They report amounts of XYZ but I have a feeling they are much larger than what they are reporting. We also did not know (until recently) that an emergency loan was extended to BSC to the tune of $13b…no mention of that at all.

    There is too much crap and obfuscation going on in the system to allow me or many other people to have ANY confidence in the fed’s ability to knit a pair of socks let alone manage an asset bubble that benefits the very people that created it.

    I’d love to have confidence in the market…..each and every day they produce several reasons not to….but we should ignore the reasons and just “buy”…that’s what got us here is the first place.

    Ciao
    MS

  30. MarkD says:

    @ralph I think the wild west thing is coming to an end (thank whoever) and the masses are changing leadership. look at the 3 special elections

  31. DonKei says:

    Regarding oil and inventories…keep in mind that there is plenty of crude in the ground, just like there is plenty of rice and corn in the silos. When prices are rising this fast, holding on to the inventory (i.e., leaving the oil in the ground) is can’t miss investment strategy. The oil becomes more valuable just sitting there, and refusing to pump it, particularly for a big producer, like say, Russia, just makes the price go higher.

  32. jag says:

    I agree with jkw.

    For the life of me, I cannot understand why the Fed didn’t even consider raising margin requirements in the dotcom frenzy/Y2K.

    What if the Fed instituted a policy that would systematically raise margin requirements when stocks (or other asset categories) get out of line by some historic/widely understood metrics?

    Would it be so hard to state that when p/e’s exceed, say 25, the margin would increase in 10% increments as the (clear) speculative aspect of the market was increasing? Would it be a problem to just tell people they’re going to have to put up more cash as they speculate deeper into the woods?

    Similarly, would it a problem in the housing market to tell banks they can lend however they want but will have to put up increasing capital, at increasing levels, as they extend credit to “hot” markets and when they use exotic (no doc/nothing down) loans?

    This gets them out of the game of trying to manipulate and fine tune interest rates and allows a dampening of excess without the Fed being accused of trying to “direct” the market.

    If bubbles are a result of “easy” money why not have a policy regarding margin requirements that automatically “leans into the wind”? Everyone would know their costs would rise, cushions against disasters would accrue faster and higher AUTOMATICALLY. Why would such a simple, incremental and widely understood policy be a problem for anyone in the game?

  33. william roth says:

    Clearly the stock market is in a bubble, not very far from its all time high despite a worsening global recession, increasing inflation, and insolvent or near insolvent financial institutions. Shouldn’t the Fed pop the current stock market bubble, which is based on irrational exuberence?

  34. DonKei says:

    Personally, I’d prefer that the fed did nothing except provide a stable currency, both internationally and domestically, such that it is a highly useful medium of exchange and store of value.

    If economic actors want to speculate and blow up asset bubbles, fine let them, but don’t go bailing ‘em out when their bets go sour–no matter what damage to the economic system that might involve. The best antidote to excessive risk taking is the pain of losing money.

    We’d be on the path to real and sustainable economic growth by the end of this year had the fed allowed Bear Stearns to fail. Instead, get prepared for about 4-5 years of mailaise.

  35. william roth says:

    Clearly the stock market is in a bubble, not very far from its all time high despite a worsening global recession, increasing inflation, and insolvent or near insolvent financial institutions. Shouldn’t the Fed pop the current stock market bubble, which is based on irrational exuberence?

  36. Angelos says:

    On the question of how to identify a bubble, I believe we should apply the same principal as we do with pornography: Its very difficult to define pornography,but you can certainly recognize it when you see it.

  37. Neal says:

    Can the Fed identify and pop bubbles before they happen?

    Frankly, the Fed can’t even very well pick their nose.

  38. xav says:

    Identifying bubbles is easy. Just check risk premiums.

    When borrowing rates are 6 %, and rental yields are 3 %, you have a bubble.

    When 5 year CDs yield 50 % more than rental yields, you have a bubble.

    This may be wrong in an inflation environment though, such as what happened in the 70′s. But the threat today, is deflation, not inflation. Higher food prices are just going to contribute to less money that can potentially be spent on other things such as housing (wages won’t increase this time), thus lower home prices/rents.

  39. gv says:

    You cannot identify bubbles until after they have burst.

    Just look at all the newspaper articles and comments. If it was so clear there was a bubble one year ago, why were so few people talking about the urgency to do something about it? I admit there were some, but you can find pessimists anytime, anywhere.

    Why are we talking about it so much today?

    Well, one year ago, we were not sure.

    I remember when the oil was 40$ a barrel, there was some talk about an oil bubble. We know now that it was not even close to a bubble back then. But back then, we were not so sure. If the margins were raised and speculators cut of when the oil was 60$, where would the price be now? It wouldn’t be 20$, that’s for sure.

    So tell me, is there a bubble in commodities? There might be one. But we will not know until it bursts, and then there will be plenty of ideas how we could have prevented it…

  40. Estragon says:

    IMV, there are three issues here.

    1. Can bubbles be identified and quantified accurately in real time?

    2. Are tools available to bring these specific asset prices back to whatever is determined to be a normal level without unduly affecting the wider economy?

    3. Should monetary authorities be concerned with abnormal price appreciation in specific assets or classes, or should they instead be concerned only when asset prices are moving abnormally in aggregate?

    The first question is difficult. Each asset class is different, and in virtually all cases metrics such as those BR suggests involve arbitrary judgements.

    The second is even more difficult. To the extent asset prices are being driven by excess money or credit creation, popping one bubble is likely to cause another to inflate. To the extent the asset prices had a basis in fundamentals, popping the bubble takes away incentives to reduce demand and/or increase supply. Laws of unintended consequences are very likely to assert themselves.

    The third is the crux of the issue IMO. Just as the fed doesn’t (and probably can’t) target individual consumer prices, it shouldn’t target individual asset prices.

    As a first step, it seems to me that more effort and research should be devoted to developing indexes of asset prices, and to the question of how these aggregate asset prices interact with growth and consumer prices. We might argue about the details of consumer price indexes, but at least we have fairly detailed and comprehensive data to work with.

  41. gv says:

    A look at the november 2004 zeitgeist: http://www.bloomberg.com/apps/news?pid=10000039&refer=columnist_currier&sid=aXh_w8JRj3G4

    According to Jeremy Gratham (a highly knowledgeable investor, according to wikipedia), there was an equity bubble back then, and he expected the S&P 500 to revert to its mean, which he estimated at 720.

    Now there’s some investment advice:) Want some more bubbles?

    “Look no further than the almost-doubling in the price of crude oil over the last year. ”

    This was november 2004. Now, take a look at the charts of S&P 500 and oil, and reconsider: do you really know when there is a bubble?

  42. Steve in TN says:

    Sad that we don’t have a coherent energy policy which is the source of a lot of our problems. I thought the Bush admin. would put their hands around this, but I was wrong.

    We should have had massive investment in wind farms to free up the huge amount of natural gas used in electric generation – which is a crime. This NG could then go directly into the transportation sector and would lower the price of oil.

    Sadly, we have had no leadership in this area.

  43. David says:

    The Fed should focus on stable monetary value. Asset bubbles will always happen. Period. They happened with the gold standard, with fiat currency, and they’ll happen in the future.

    There’s no hope to identify them and pre-emptively strike. However, if the Fed keeps its eye on the ball on maintaining a stable $, then perhaps there will be fewer of them, when they occur, they’ll be smaller, and perhaps cleaning up the mess won’t be quite as difficult. Or maybe not.

  44. bart says:

    What Greenspan actually said on bubbles:

    “When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets. What in fact occurred is that, as evidence of the dramatic shift in the economic outlook began to emerge after we moved and long-term rates began to move up, we were also clearly getting a major upward increase in expectations of corporate earnings. While the stock market went down after our actions on February 4th, it has gone down really quite marginally on net over this period. So what has occurred is that while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions.

    “So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System.” (emphasis ours)
    – Alan Greenspan, Chairman of the Federal Reserve

    Source: Federal Open Market Committee (FOMC) meeting minutes from March 22, 1994

  45. Unsympathetic says:

    Should the central bank prick bubbles? Obviously. Can they? The only reason the housing bubble happened was due to willful negligence on Greenspan’s part. OF COURSE THEY CAN. Will they? Certainly not, silly rabbit.

    The reason Tanta should be on the forefront of everyone’s mind is that her skills are what keep bubbles from forming. Loan prudently and you’ve got no bubble in anything.

    Yes, it’s “no fun” living in a world where risk managers are the leaders. However, now we get to remember what it’s like to live out a bad recession.. one that was thoroughly avoidable, thoroughly preventable, and thoroughly unrequired.

    Thank your local Republican!

  46. Alfred says:

    Greenspan’s Ayn Rand approach towards markets is the right one. Regulators should not preemptively interfere with market forces, because such would threaten to permanently influence efficient markets. The dilemma is that we cannot trust market fundamentalists (Ayn Rands libertarian approach) either. George Soros claims market fundamentalism and its distortion of reality for the end of a superboom.

    It would be like replacing one faulty paradigm with another one. It won’t work. Regulators should do what they are supposed to do: enforce oversight (e.g. monitoring lending standards, adequate capitalization, proper stress tests..)

    As I keep saying the problem with the Federal Reserve is its status as an independent central bank. I don’t think that anybody can still believe after what we have seen in the current episode. Preemptive actions in economics serves no one but a few on Wall Street.

  47. xav says:

    David,

    I don’t know what happened during the gold standard, but it seems to me pretty obvious that asset bubbles are much more likely to be severe when there’s too much liquidity in the system.

    That’s exactly what happened. The FED and other central banks overprinted following the tech bubble crash. That money had to go somewhere. The central banks in general and fractional reserve lending are a big contributor to this mess.

  48. Winston Munn says:

    What else can you call it but price control when the Fed controls the price of interest rates?

    History proves price controls do not work.

    The Fed will not intervene with bubbles. There is no choice left to the U.S. economy but bubbles – it comes with the FIRE economy. The only hope is discovering early the next mass bubble. It will have some indentifiers: 1) It will have to be a huge area of investement to recoup the trillions in lost asset value of houses 2) It will need to have government backing and sponsorship as in tax breaks and incentives. 3) It will need to be the “hot” topic of the day, the one on everyone’s lips.

    A real good guess for the next bubble industry is alternative energy.

    Forewarned is forearmed.

  49. notgv says:

    “As far as I know, bubbles have been around for much longer than the fed. Who was inflating them when there were no central banks? You can’t blame the fed for something that happened in the 17th century.” gv

    Actually gv, if you study your monetary history you might find out that the boom and bust cycle was discovered by Ricardo and identified as a result of credit expansion by one of the first central banks- The Bank of England (1694).

    Fractional reserve banks have existed before that, but without central banking they tended to collapse rather quickly.

  50. Pan says:

    Panama Has No Central Bank
    http://mises.org/story/2533

    “For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past; the example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment.”

  51. Chris says:

    The guys over at The Deal.com certainly see it your way as a much more lending and credit crisis

    http://www.thedeal.com/servlet/Satellite?pagename=hpa&p=M4YD5AR1&c=TDDArticle&cid=1210002281217

  52. BG says:

    Bernanke Requests From Pelosi Power to Pay Interest

    Within the article, it states “Banks are required to hold a proportion of customers’ deposits in an account at the Fed. They also hold reserves in excess of their required balances to meet payments. If the Fed paid interest on excess reserves, banks would be less willing to dump them into the money markets, pushing the federal funds rate lower. ”

    Does anyone have any comments on this? I’m confused.

    This just looks like another mechanism (excuse) for the Fed to give banks more free money. It strikes me as really strange that its intent is to PREVENT banks from investing excess funds in the same financial system the rest of us use on a daily basis. I always thought they controlled the amount of money in circulation by the buying and selling of Treasury Bonds.

    I never really thought it was such a bad thing if the Fed Funds rate dropped because there was excess money available for potential loans. Wouldn’t another bank that is needing funds bring the excess balance back toward the desired level? I mean the banks lend to each other all the time without the Fed ever getting involved at the Fed Funds rate! Wouldn’t this tend get the Fed involved in more financial transactions rather than less? I thought the Fed was supposed to regulate and let the banks do their thing and only come to the Fed when absolutely necessary at the discount rate.

    I just see it as an excuse to give the banks more free money. Plus if it is coming from the Fed and not another commercial bank, isn’t it really coming out of taxpayer’s pockets instead of the accounts of another commercial bank?

    I understand you wouldn’t want the Fed Funds rate gyrating all over the place; but, is that really what is going on here? I don’t know. This just looks suspicious to me.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aEcNpHK8alWg&refer=home