Saturday, August 15, 2009

Bubble Blowing Fed

"President Barack Obama proposed last month that the Fed act as an overall 'systemic risk' regulator, with consolidated supervisory responsibility over 'large, interconnected firms whose failure could threaten the stability of the system.' Now William C. Dudley, the ex-Goldman Sachs economist just appointed president of the New York [Fed] has upped the ante. He thinks the Fed should be responsible for identifying and preventing asset-price bubbles. Considering that the Fed's track record reveals more skill at causing bubbles than preventing them, this is a very dangerous idea. ... Mr. Dudley claims that 'Asset bubbles may not be that hard to identify--especially large ones' and suggests 'additional policy instruments'--that is, new regulatory powers for the Fed to 'more directly influence risk premia.' Because risk premia are a key element in determining asset prices, Mr. Dudley is effectively asking for the power to control asset prices. ... Mr. Dudley seems surer of himself. He notes confidently, by way of example, that 'the housing bubble in the [US] had been identified by many by 2005.' Well, that's true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices. ... There can be no assurance that those who hold the correct [opinions] about what is or is not a bubble will end up at the Fed, where they can make prescient policy decisions", my emphasis, Donald Luskin (DL) at the WSJ, 30 July 2009, link:

Dangerous? For who? All except, GSG. I agree with DL. Did the "prescient" Dudley warn the US about the housing bubble in 2005? If not, why should we listen to him now? What did Dudley learn at Berkeley, where he got a PhD? Dudley was a Fed economist from 1981 to 1983, then to Morgan Guaranty, then to GSG in 1986. I'm sure GSG could tell us how public spirited Dudley is. Who needs this guy?

1 comment:

Anonymous said...

Nailed it IA.

Nominating Mr. Dudley for the 1st Annual Vampire Squid Alumni award... tough competition in the "migrate to regulator/public official" category... Paulson, Gensler, Friedman, Corrigan, Rubin, Zoellick...