Let's talk about Bush's Fed Appointee Bernanke

Popping Bubbles

WSJ.com - Fed Governor Says Bank Was Right to Allow Bubble <http://online.wsj.com/article_print/0,,SB1034717108510445116,00.html>: If the Federal Reserve had tried to curb stock prices during the late 1990s, it could have plunged the economy into a depression, repeating the mistakes of 1929, a Federal Reserve governor said. A central bank can rein in an apparent speculative bubble "only at the risk of throttling a legitimate economic boom or, worse, throwing the whole economy into depression," Fed Governor Ben Bernanke said in a speech in New York. Mr. Bernanke was stepping into a debate that has raged for the past year and a half, since the economy fell into a recession from which it is still struggling to recover, largely because stock prices have tumbled from the euphoric heights of early 2000. Critics argue the Fed should have acted sooner to limit the stock boom, in part through sharper increases in interest rates during the late 1990s. Some say the Fed should have boosted margin requirements, making it harder to buy stocks with borrowed money...
Fed Governor Says Bank
Was Right to Allow Bubble
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
If the Federal Reserve had tried to curb stock prices during the late 1990s, it could have plunged the economy into a depression, repeating the mistakes of 1929, a Federal Reserve governor said.
A central bank can rein in an apparent speculative bubble "only at the risk of throttling a legitimate economic boom or, worse, throwing the whole economy into depression," Fed Governor Ben Bernanke said in a speech in New York.
Mr. Bernanke was stepping into a debate that has raged for the past year and a half, since the economy fell into a recession from which it is still struggling to recover, largely because stock prices have tumbled from the euphoric heights of early 2000. Critics argue the Fed should have acted sooner to limit the stock boom, in part through sharper increases in interest rates during the late 1990s. Some say the Fed should have boosted margin requirements, making it harder to buy stocks with borrowed money.
Fed Chairman Alan Greenspan addressed those critics in an August speech in Jackson Hole, Wyo. A bubble, he said, is hard to identify, and popping it would require raising rates enough to cause a severe recession -- the very result the Fed is supposed to avoid. Higher margin requirements would have done little to rein in stock prices, he added.
The debate about what the Fed should have done during the late 1990s is unlikely to be resolved soon. The Fed believes that rather than raising rates to prick a bubble, a central bank should wait for the bubble to burst on its own, then mitigate the damage by cutting rates and keeping them low, to keep the economy liquid, as the Fed is doing now. If the U.S. economy returns to a normal growth rate quickly, the Fed's strategy will be validated. But if the economy falls back into recession or stagnates, as Japan's has, then the critics could appear right.
On Tuesday, Mr. Bernanke went further than Mr. Greenspan in defending the Fed's refusal to rein in stocks. While Mr. Greenspan explicitly called the market's 1990s surge a "bubble," Mr. Bernanke was willing to defend the logic behind the stock market's rise. "Strong bull markets are inevitably followed by raging bears," he said, and the fact that a price rise is followed by a drop doesn't mean it was "irrational or unjustified -- sometimes strategies that are perfectly reasonable ... just don't pan out."
Some of the 1990s surge in stocks "was apparently justified by the fundamentals," Mr. Bernanke said, citing resurgent productivity growth. If the Fed had somehow prevented the bull market from 1995 to 2000, he said, it "would have throttled a great deal of technological progress and sustainable growth in productivity and output."
Mr. Bernanke, who joined the Fed two months ago, had been an economics professor at Princeton University and is a leading authority on monetary policy, in particular during the Great Depression. A study he co-wrote for the Fed's 1999 Jackson Hole conference influenced the central bank's own thinking on how to respond to the market's rise. The study said the Fed should worry about asset prices only to the extent that they threaten its goal of maximum sustainable employment with low inflation.
Mr. Bernanke argued Tuesday that the folly of trying to deflate a stock-market bubble was demonstrated by the Fed's efforts to do just that during the late 1920s. Stocks rose steadily during the 1920s, reflecting U.S. prosperity and technological innovation. At first, the Fed resisted calls to hold down stock prices -- thanks largely to the leadership of Federal Reserve Bank of New York Governor Benjamin Strong. But after his death in 1928, the Fed came under the control of "aggressive bubble-poppers," Mr. Bernanke said.
In 1928, with consumer prices falling and the economy just emerging from mild recession, the Fed began raising rates from 3.5% to 6% by August 1929. The economy thus already was slowing by the October 1929 market crash, Mr. Bernanke said. The Fed deepened the depression by doing little to protect the banking system from depositor runs and panics, and it permitted a severe price deflation that drove up real debt burdens.
The lesson, he said, is that monetary policy should be used for maximizing sustainable employment and keeping inflation low. But it is too blunt an instrument for fine-tuning asset markets. The Fed should rely on its supervisory functions to ensure that the financial system is strong enough to withstand sharp moves in asset prices, he said.

1. This part interests me

"At first, the Fed resisted calls to hold down stock prices"

Could the new "resistance" be home prices?

[rapier]

2. notes

I can't link to the WSJ article, subscription only. Bernake has been a board member for quite awhile, at least a year.

Ben is the first central banker in history to brag about the ability of the monetary authorities to print money without limit. This shows the scope of new age we have entered. If Bernake represents 'conservatives', which he does in large measure, and the money/financial establishment, which he does in spades, then the embrace of unlimited money and credit creation represents a total abondonment of everything conservatism and sound money establishment types have held as sacred for 200 years.

The world has been turned on its head.