Tuesday, October 28, 2008

Bernanke's Bubbles

"The [Fed] and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles. ... The bursting of this decade's housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage. ... While it is too soon to pronounce an about-face in Fed thinking, policy makers' views clearly are evolving. ... Even if the central bank could identify a bubble, policy makers said, trying to lance it would be far worse for the economy than letting the bubble run its course and dealing with the consequences. ... By giving market participants an incentive to assume greater risk than they would have otherwise, the Fed's laissez-faire position on bubbles may have contributed to the surge in credit that helped puch housing prices skyward in the first half of this decade. ... Policy makers need to be more careful of valuing their judgment over the collective judgment of the market, because efforts to quash prices could interfere with the crucial role markets play in relaying information and allocating capital", my emphasis, Justin Lahart (JL) at the WSJ, 17 October 2008.

Next JL will quote Frederich von Hayek and Adam's Smith's "invisible hand". One purpose of the Fed is to direct credit to projects the market doesn't want. Like big banks. Repeal the Federal Reserve Act!

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