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Sunday, January 3, 2010

The Fed Won't Rule Out Repeating History

Fed Chairman Ben Bernanke says that stricter regulations would have prevented the current crisis. He downplayed the Fed, and his predecessor's involvement, and then threw a financial shot across the bow.

Bernanke said, however, in a speech to the American Economic Association, that policy makers can no longer eliminate rate increases from their arsenal to prevent future crises.

"If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplemental tool for addressing those risks,'' he said.

Bernanke conceded that efforts by the Fed and other regulators beginning in 2005 came too late or were insufficient to slow the housing bubble.

That's nice. The last time the Fed raised rates to stop a bubble was in 1999-2000. That certainly did pop the asset bubble in the internet and technology sectors. That also lead directly to the recession of 2001-2003. Then, the Fed lowered rates furiously leading directly to the bubble that's caused the current crisis.

Now, the Fed has lowered rates so low that they can't go any lower. They're now telling people that future bubbles will be popped by the Fed itself. Of course, last I checked, popping bubbles wasn't in the job description of the Fed chairman. At least this one is being honest. When Greenspan popped the internet bubble, he claimed he was raising rates to head of inflation, which was of course non existent at the time.

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