The Federal Reserve and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles.
"[O]bviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it," Fed Chairman Ben Bernanke said this week.
The bursting of this decade's housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage. The U.S. economy was faltering before the crisis in credit markets recently intensified, rattling financial markets and sending home prices down further. Even if the government's decision to take stakes in major banks works, it could take weeks for money to flow freely again.
In other words, not only does Fed Chairman, Ben Bernanke, think that the Federal Reserve should be given new powers to pop market bubbles, but furthermore, he won't even recognize that previous Fed action already did this and it had disastrous results.
First, let's review. Back at the end of 1999, then Federal Reserve Chairman Alan Greenspan began a series of Prime Rate increases. These increases lead directly to the bubble bursting on the internet boom. There is absolutely no doubt that one action lead to the second result. The only doubt is whether or not this was actually the intention of Alan Greenspan. Some, like me, argue that popping the bubble was his intention all along. Greenspan has always maintained that he was concerned about inflation. Regardless, there is no doubt that his interest rate increases lead directly to the bubble bursting.
As such, for the Federal Reserve Chairman, Ben Bernanke, to say that the Federal Reserve should look in the future to pop bubbles seems to dismiss what previous action has created. When Greenspan's rate increases popped the internet bubble, that lead directly to a recession. Furthermore, within a year of furiously raising rates, Greenspan was forced to drop them even more furiously to try and stimulate the economy from the recession his own rate increases lead directly to. That was the wreckage wraught the last time the Fed popped a bubble, intentionally or not, and yet, it appears that the same Federal Reserve is now considering making such action a matter of policy.
Let's look at this issue and see how frightened we should all be. First, the Federal Reserve Chairman is likely the most powerful person in the world already, and that's when their duties are "only" managing the money supply and regulating banks. Now, the same Fed wants to increase their power by adding the duty of popping market bubbles as well. Furthermore, they want to do all of this while simply ignoring that previous Fed action did exactly this and it caused a recession.
I am convinced that the all powerful Federal Reserve is also held in far too high esteem. What this causes is not only for the central bank to have far too much power, but it insulates the central bank from much needed criticism of its action. I doubt you will find one mainstream writer that points out what should be obvious to everyone. For the Fed to claim that popping bubbles would be a new policy would also be for the Fed to ignore recent Fed history. For the mainstream media not to point out how stunningly dishonest such a statement is would also insulated the Federal Reserve from criticism that it is vital the media must make in relation to much of its action.
For full analysis of the last ten years of disastrous fed policy take a look at this link.
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