A new, improved bubble-popping Fed

If Greenspan were dead, he'd be turning in his grave. Bernanke and Co. may be considering a significant change in how the Federal Reserve manages the economy

By Andrew Leonard
May 14, 2008 7:43PM (UTC)
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Imagine this: Learning from experience, rather than ideology.

Dean Baker says that an article in the Financial Times reporting that the Federal Reserve "is reconsidering the way it deals with asset price bubbles in the wake of the housing and credit bust" is "huge."


Presumably this is because it would represent a rather stunning repudiation of Alan Greenspan's practice of sitting back and letting bubbles expand without restriction, or, even worse, feeding them with excessively low interest rates.

Two points are worth underlining from Krishna Guha's story.

The first is that Ben Bernanke has historically supported the Greenspan position that using monetary policy to combat bubbles was "likely to do more harm than good," but that he is now "willing to re-evaluate it in the light of recent events."


After nearly eight years of a presidential administration in which the facts on the ground almost never resulted in a change of policy, it is remarkably refreshing to hear that a Bush appointee may be acknowledging that sometimes, you know, you gotta go with the flow, and change your strategy according to the dictates of actual reality.

The second is that, according to Guha, the preferred technique for popping emerging bubbles doesn't have to be raising interest rates -- it could be a "regulatory" approach.

By contrast, there is widespread interest inside the Fed in using regulatory policy more aggressively to try to contain bubbles. Officials are intrigued by the extra possibility that could be opened up by proposed new powers set out in a Treasury blueprint for regulatory reform.

The Treasury recommends giving the Fed wide authority to require financial institutions to alter behaviour that it believes poses a threat to financial stability.

Yesterday, I noted that a Bloomberg profile of Ben Bernanke suggested that he might become the most powerful Fed chairman of all time. If, under his watch, the Fed adopts a new policy in which it directly reins in Wall Street when the high-finance boys start running amok, I think we'd have to concede the point.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Alan Greenspan Ben Bernanke Federal Reserve Globalization How The World Works U.s. Economy