Fed Chief Edges Closer to Using Rates to Pop Bubbles
Bernanke Sees Monetary Policy as Potential Antidote, but Blames Lax Regulation — Not Central Bank Policies — for Housing Crisis
ATLANTA — Federal Reserve Chairman Ben Bernanke cracked the door open a bit more to the idea of raising interest rates if a new financial bubble emerges.
He also mounted a vigorous defense against critics who say it was the Fed’s low-interest-rate policies over the past decade that caused the last housing bubble. Instead, he said, the problem was lax regulation, which permitted banks to issue a slew of exotic mortgages that households later had trouble paying.
We must be especially vigilant in ensuring that the recent experiences are not repeated,” Mr. Bernanke said in a speech Sunday at the American Economic Association’s annual meeting here. Better regulation is his first line of defense against future crises.
(Read more from online.wsj.com)
Commentary by Patrick Barron: The Fed is trying to do the impossible–pump massive amounts of money into the economy without causing another bubble. So, it thinks it can regulate away bubbles and malinvestment. This is possible only if its regulations are so onerous that they destroy production. The Fed should stop monetary inflation, stop monetizing the debt, and abolish financial regulations.