It appears that members of the Federal Reserve are beginning to realize that asset bubbles can be dangerous:San Francisco Federal Reserve President Janet Yellen said late Thursday that central banks need to deal with bubbles in asset prices before they get too big, although monetary policy may not be the best tool for the job.
Letting them go unchecked "can lead to grave consequences," she said in prepared remarks for a conference held in honor of economist Hyman Minsky in New York.
"Episodes of exuberance, like the ones that led to our bond and house-price bubbles, can be time bombs that cause catastrophic damage to the economy when they explode," said Yellen, a voting member this year of the Federal Open Market Committee. ...
"I would not advocate making it a regular practice to use monetary policy to lean against asset-price bubbles," she said. "However, recent experience has made me more open to action."
Boston Fed President Rosengren seems to agree:[Rosengren] also says the “starting point” for a systemic regulator would be to monitor rapid appreciation of asset classes, financial institutions or financial markets. The first task would be developing “a plausible fundamentals-based explanation of the rapid rise in prices.”
Translation: Spot the bubbles and decide whether to do something about them. In the past, almost every government agency has struggled to deal with the what-to-do-next question. Would a systemic regulator have more success? Mr. Rosengren thinks so.
It's good to see that members of the Federal Reserve are beginning to change their mind on this. They could have acted to prevent our current economic troubles seven years ago or so, but they chose not to and many Americans are now feeling the pain caused by the Fed's inaction.
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