Wednesday, November 18, 2009

The Fed And Bubbles

On the same day that Ben Bernanke made his speech mentioning the dollar, his intellectual blood-brother Don Kohn made one that touched heavily on the issue of asset bubbles. At the risk of over-simplifying the speech, Kohn essentially said that monetary policy is an inappropriate tool for addressing ongoing asset bubbles, and that regulation is the preferable policy option. Oh, and we're not currently observing another asset bubble forming before our very eyes.

His defense against using monetary policy to address bubbles was essentially "gee, it sure didn't work in the dot-com bubble of '99 or the housing bubble of '04-'05". The obvious rejoinder to this argument, of course, is that despite hiking rates the Fed never managed to arrive at a tight
monetary setting; Macro Man's nominal GDP indicator suggests that policy remained moderately easy during the late-90's tech bubble and ludicrously easy during the housing boom.

So from that perspective, Kohn's argument is specious at best; the Greenspan Fed never properly applied monetary policy to address asset bubbles!

At least Kohn conceded that the Fed's regulatory policy (i.e., "who? me?") had been, ahem, sub-optimal. And it doesn't seem to be a stretch that regulation should play a stronger role in addressing asset bubbles moving forwards; hell, even requiring mortgage applicants to send in $5.99 and two box-tops from Lucky Charms would significantly raise the reporting hurdle from its 2005 liar-loan nadir.

Still, if Kohn's claim that "our abilities to discern the "correct" values of assets is quite limited", how can the Fed fail to recognize that Nasdaq 1999-2000 was a bubble.... was the 2003-05 housing market.....
...and oil last year.....
...but that a less than 10% decline in the value of the S&P 500 in the first few weeks of last year was sufficiently worrisome that it merited a 75 bps inter-meeting cut a mere 8 days before a regularly scheduled FOMC policy decision (which produced a further half-point cut.)?
Put another way, why does the Fed feel powerless to identify bubbles in real time, but is evidently highly confident in its ability to determine when asset prices have fallen below equilibrium?

If the Federales are truly concerned about ensuring financial stability, addressing asset price moves in a symmetric fashion would be a great place to start. Because on the evidence of the last dozen years or so, the Greenspan/Bernanke/Kohn is a helluva lot more trouble than it's worth.


Anonymous said...

The parabolic rate of intellectual depletion of major fedheads and their friends und fans corresponds directly to the parabolic rise in certain bricks price. Their IQ insolvency is the sole driver of the metal/s. They somehow managed (and this by no means is an underachievement under any standard) to self-corner themselves into this feed on itself back loop.

And so, here we go again.

More bricks to hedge “efficiently“ against these (oh so independent) brains.

The only thing they were/are independent of is reason.

Nemo Incognito said...

Amen. Good to see that Rick Bookstaber is going to the SEC, once we have another EM bubble over the next two years or so we might have the pendulum swing back to having monetary policy that targets inflation and securities regulators that address systematic risk. Heaven forfend these two institutions actually do the sensible thing.

GreenAB said...

read (start at "Bernanke in 2003") and you´ll never doubt again what the fed is targeting.

GreenAB said...

well, posting that pimco McCulley link didn´t work.

go to -> content archive -> Global Central Bank Focus -> 07/09 "What If"

Anonymous said...

Don't forget gold which is on a rip... is its price fair or are we entering bubble territory? Given the Fed's take on bubbles im guessing it reflects a fair valuation both at current levels and 100% higher.

bsanchez said...

All those pretty Taylor rule charts agree with you.

The problem now is the zero bound and Krugman simplifies in his latest post stating that because Taylor's rule suggests a negative rate now and for the foreseeable future we shouldn't see Fed rates rising any time in the medium term.

I guess the point is that QE acts as additional loosening of monetary policy below the zero-bound but is difficult to quantify in Taylor rule terms. So in effect we have no way of knowing whether with the $1 trillion increase in the monetary base in the past 12 months monetary policy now is too loose, still tight (as Krugman suggests) or just right.

What do you think?

Anonymous said...

Newspeak brownie points earned.

Akin to the strong dollar policy of Timothy and his respective predecessors from prior administrations.

I appreciate a good sense of humour.

jc said...

Great post MM.

So from that perspective, Kohn's argument is specious at best; the Greenspan Fed never properly applied monetary policy to address asset bubbles!

You could argue actually that monetary policy was being run "appropriately" as the Fed did keep rates with an acceptable range vis a vis inflation and the Taylor rule art the time. In other words inflation, or rather CPI based inflation was actually well behaved during the great moderation.

There's two things I would add. The problem we have is interest rate targeting and the fact that the CPI I believe is not a reasonable anchor for measuring inflation. I ma not advocating a gold standard as i don't believe we could ever get back to that fabulous system again as the world has changed.

Perhaps another measure of inflation or actually targeting 12 month CPI would be a better alternative. In other words the CB's should be far more long term in their policy commitment.

MM, Kohn is kind of right is suggesting that The Fed can't target bubbles. He's going back to and criticizing the Real Bills Doctrine of the Fed which was a time when the CB actually did try to manage, or control bubbles and it turned into two depressions.

Perhaps the real problem was that the Fed:

1. Didn't get its act together quickly enough in recognizing the dire consequences and

2. It went too tight and sent the economy over the edge.

jc said...

another suggestion would be to actually close the gap in terms of the CPI and not allow .5% either side of zero as the present target of 2% odd may be too high.

jc said...


Please ignore Krugman's krubbish as he really doesn't seem to understand monetary economics. he simply doesn't get it.

PPM said...

Anon at 10:53 has a good point: CPI is not a perfect measure of inflation. Massive inflation in economic factors that aren't captured in the CPI basket, such as financial assets, has just as much (if not more) potential to case long term economic harm, than consumer inflation.

It is really easy to attain success if one sets the bar low enough.


Skippy said...

I had an interesting one-on-one meeting at the MS conference today in Singapore with an analyst (who was not of the usual cheerleading variety). He had just had a meeting himself with the China Banking Regulator Chairman (the guy who was surprisingly frank about US Fed policy in the FT the other day). The key point was that he is just scathing about China's massive loan growth and the (not surprisingly) high probability that many of the loans may be NPLs of the future. Again not surprisingly, many of the loans were granted at such a rapid pace that the standards were very low.

The challenge of course is the timing, but 10 trillion of loans (about 30% of GDP) in one year is extremely easy monetary policy and must have consequences, eventually. Perhaps, as MM noted the other day, the withdrawal of policy stimulus (a slowdown in loan growth) may be problematic for growth assets next year.

Steve said...

Interesting Skippy. Yes a trillion in loans and 2/3 trillion in direct Keynesian stimulus will get things going, esp is an economy less than 1/3 the size of the US.

It's almost like these guys WANT bubbles to cure what ails us, with presumably some vague notion that they will have to prick them 'when things get better.'

Greenspan may have been obtuse enough to not see bubbles, but I think Bernanke will try to let some of the air out--one day. Certainly not before he's confirmed.

Macro Man said...

The problem with saying that Fed policy was appropriate in the late 90's and '03-'05 is that it assumes that the taylor rule estimate of the output gap is correct, and that an output gap framework is appropriate to maximize employment and prie stability in the medium/long term.

Concurrently, private sector assumptions of the return on investment from IT infracstructure in the late 90's and housing in 03-06 were grossly overoptimistic. From that persepctive, as well as my little nominal GDP overlay, policy was decidedly suboptimal during the bubbly periods.

Macro Man said...

bsanchez, I tend to think that IF the consensus for the next couple of quarters is right (and I am by no means confident that it is), then by the spring or so the appropriate setting will have caught up with the zero bound.

jc said...

We also need to be careful about suggesting ALL bubbles are bad. It's not that clear to me that the tech bubble was necessarily a bad thing when taking into account the technology we got out of it. Sure people lost money however I would argue that the world made substantial gains from that bubble.

That's how I learned to lie down and love bubbles :-)

That's why Kohn is right I think.

Anonymous said...

Don't care about this issue at all.
Loose monetary policy has at all times been an invititation for risk takers to get their nose in the trough.So asset prices 'bubble up' then try selling them when your nose bag is overflowing.The only people getting upset should be those who for whatever reason don't get in because they end up paying for it anyway ,but don't even get much benefit.Tough.

Macro Man said...

But the problem, jc, is that in their effort to soften the blow of the IT investment collapse, the Fed ended up ballooning the housing bubble...and where did that get us? I don't think you can view any financial developments since LTCM independently...they all follow on from each other, blowing up mo and more leverage in the financial system until it popped 27 months ago.

And there's nothing to say that all of that IT inrastructure wouldn't have been built had the Fed run a tighter ship (rates + regulation) in the late 90' just may have been spread out over a longer period, taking the place of some of the more egregious residential investment and, ultimately, making or a smoother cycle.

jc said...

Macro Man:

I think there's a decent case to be made that the Fed rather than being wrong with policy conduct in the earlier part of the decade was wrong in the way it tightening and sent everything over the edge. There was a lot of bad crazy shit that happened in 08. Recall that the ECB actually raised rates in July. The Fed was also talking about tightening at the time as well. These guys totally missed what was going on.

Saying all that I'm not sure how to solve things as not having a decent anchor to currency is problematic.

As far the tech crash.... It's not unreasonable to speculate on future returns on an untested technology.

Alan said...

Bubbles keep parts of economies moving which generates activity, jobs, and tax surely it could be argued that a government should allow bubbles to occur, or at least growth to occur, and then try to slowly deflate the bubble by encouraging transfer of the money into other assets or areas.

But What do I Know? said...

Great post, MM--do you think the Fed guys are being dishonest or incompetent when they insist that they can't recognize an asset bubble (or maybe a little of both.) I especially like the part about how quick they were to cut rates when the market dropped a mere 10%--I had forgotten about that.

To me, the greatest failing of the American leadership is the insistence that high (nominal) asset prices are evidence of successful economic and monetary policy. It is equivalent to saying that your son's report card full of "A's" means he's learning something, and that if we just give all the children "A's" the educational system would be the best in the world.

A couple of "C's" can be good for a boy's development. . .

jc said...

Look, Australia had pretty loose monetary policy through the decade. The currency at one stage was 50 cents for a long while and the yield on real estate was lower than in the US.
However Australia hasn't suffered a property crash like the US.

There was a ton of awful stuff that wrnt on in America. The US real estate market.. residential is far more socialistic/interventionist than elsewhere.

Community reinvestment act.

Government directed loosening of credit standards to support social agendas a both state and federal level.

The various zombies- Fred and Fannie.

SEC guidelines in treatment of various loans in capital allocation to favor housing.

I would suggest that the US housing problem was as a consequence of complete government failure.

Anonymous said...

Another suggestion, after the one adopted from Paul&Ben’s box, would involve re-issuing of one’s own “self-liquidating” currency. Of course, such actions are well known risky business as well as far out of any box. Much easier to carry on streaming by the QE off sprung flows to the God’s workers mills so that the turds glut doesn’t diminish.

Joe Bloggs said...


Given the appearance (my perception at least) it is 'business as usual' with the fed as they unreservedly support asset prices with essentially free money for the extended future...Bernanke ala Greenspan ...why is there not a focused global(ex. US obviously) move to withdraw the dollar as the global reserve currency in favour of a weighted basket or a Plan x,y,z alternative?

Post Enron/WorldCom/Xerox etc. we had Sarbanes Oxley within a month, an inevitable outcome as US moved to shore-up confidence in their disparaged domestic markets for investors.

Post a near death experience of the entire global financial system (US origins) and "over one year later" we have nothing/nada/zilch/bumpkin in terms of minimizing future systemic risk or tangible commitments on a global scale to address the issue(lots of agreement on stimulus packages though to put in a price floor as asset prices deleverage).

It's as if it never happened which is most confusing to the average Joe.

I wish there were trials and blood letting, unfortunately we've become too civilised for that although I'm an advocate of Alexander Tytler's cycle of bondage to dependence.

Joe Bloggs

CMC313 said...

Let's face it, Fed members are political animals, and they also covet the lucrative consulting gigs with Wall Street after their retirement from the Fed. So there is no incentive for them to take away the punch bowl. It's human nature. Kohn was Greenspan's partner in bubble his speech was merely an attempt to get himself off the hook.

Anonymous said...

why do we think that anyone can do the Fed's job, as stated, superbly well?

the economy is an unpredictable, non-linear system -- no conclave, no matter how wise, can try to manage or even massage its cycles without errors.

does that mean they shouldn't try for improvement? no, but i would offer that if we weren't talking about these mistakes over the past 20 years, we would certainly be talking about some others.

instead of asset bubbles, the systemic risk/system stability is a far, far more important issue : failures will happen, and they need to be prepared for, by some measure.

Joe Bloggs said...

Alan Said

"Bubbles keep parts of economies moving which generates activity, jobs, and tax surely it could be argued that a government should allow bubbles to occur"

to which Joe Bloggs replies

not when the primary beneficiary of 'bubble economics' are the prop desks of global financial institutions that PRODUCE NOTHING in the real economy. Hire the best and make money off the real economy only instead of skimming the top we'll cut the pie in half.

That's where the majority of GS's earnings comes from or Mr. Hall and his cohorts at Citigroup playing with the energy market.

It's as if the 'Greed is Good' benchmark has been moved to an entirely different dimension.

I'll stop now as my 'rant' has no doubt given you gents a lot of laughs.

Joe Bloggs

Anonymous said...

The tech bubble delivered some great advances but we let the crap companies fail.

The recent disaster was BANK BUBBLE. They created the lending policies, products and processes for Subprime, Alt-A, Securitization, ABS CDOs. It went too far without the proper constraints of easy credit in an environment where credit availability was expanded without "skin in the game" due to securitization. Now that the bank bubble has popped the weak should fail, but we are not allowing that to happen which is going to cost taxpayers and shareholders more.


jc said...

not when the primary beneficiary of 'bubble economics' are the prop desks of global financial institutions that PRODUCE NOTHING in the real economy. Hire the best and make money off the real economy only instead of skimming the top we'll cut the pie in half.

That's not really true, however even if it were true i would argue that as long as something.. some action.. has a positive rate of return then by any economics standard it is a worthwhile endeavor.

Anonymous said...

MM seems like you are going to start sounding like MM junior again talking about its not fair--its not fair that the policy response is not syemetric--well ok its not and if you want a reason (maybe not a good one or a fair one) its that greed and fear are not equal emotions even though there used as equal counterpoints--fear moves much faster than greed so it must be countered more quickly--don't think the feds think that much but it is da facts

Macro Man said...

Oh, please spare me. Nowhere in the post did I raise the issue of fairness or justness; my concern is policy optimality, insofar as that Holy Grail can be attained.

Serial bubble blowing and the provision of moral hazard "CB puts" has led, in my view, to gross misallocations of capital. I often call out China for this sort of behaviour, but the US is culpable as well.

If I see a dog about to shit on my carpet, I have two options: hustle him outside or reach for a plastic bag and the Rug Doctor. It seems obvious to me that the former is the preferable solution, so it seems reasonable to query why the Fed always seems to opt for the latter.

Anonymous said...

Maybe the primary issue is that CPI targeting is the main problem - it's total a red-herring.

Making the (not insubstantial) assumption that a totally transparent and comprehensive measure of money supply/stock could be created (including SIVs, CDOs, etc)...

...then given that all money in an economy has to be spent on consumption, investment, or savings (or on trade which should balance to zero over the longer-term as it did under a gold standard) then targeting a annual growth of some "reasonable number" i.e. > zero <10-15% (i.e. having some relation to a sustainable rate of nominal GDP growth) in a transparent fashion, should ensure that economic growth is financed through sustainable savings, and asset bubbles, if they appear at all, will quickly mean-revert.

On top of that the added bonus would mean that governments were limited in their largesse and the welfare-tyranny that Greenspan warned about in his infamous gold speech would be eradicated.

But I guess that is precisely why politicians and their CB-lackeys will never give up that privilege to target such a meaningless number.

Anonymous said...

Can you really take such comment from the Fed seriously? As you said in a earlier article...

"With China, the best course of action is to "watch what I do, not what I say." And right now, they're doing nothin'."

ditto Fed.

'nuff said


Joe Bloggs said...


You can tell me it provides liquidity/depth to a market and that the profit earned by the prop desk of x institution is 'positive'. Clearly for those few it is. All I see is band wagons being hitched and trends being chased to drive oil to USD 147.27 at the expense of the real economy. Tech stocks that all came down like a house of cards in Mar 2000, the housing ponzi scheme with models that priced constant perpetual growth. Commodity prices shooting higher which contain a lot of speculative trading given vast sums of mobile capital...please don't tell me it's all China/India or BRIC as a whole.

As a distant observer it just appears to be one bubble after the next - an OECD report in 2008 puts the US in terms of income inequality 3rd, after Mexico/Turkey in the industrialized world - huge diverence between the cliché dichotomy of wallstreet vs mainstreet.

Greed is an intricate part of human psychology and it is extremely naive to not accept it as such BUT the levels of it are beyond the realms of acceptance within an equitable society one could argue since the 80s and certainly the last decade and what clearly has been shown doesn't work....still appears to be the renewed 'status quo'.

Clearly my views will diverge with yours but I was hoping for an answer to my initial question also as to why nothing has happened and the US carries on regardless? The financial figureheads of wallstreet recently stated the need to remain big to retain global competitiveness---ok, rationalize that with the 'too big to fail/counterparty risk' sound byte?

I'm sitting on a 6 figure cash balance, as bad as that hurts because all I see is the fed/treasury embracing conventional wisdom/past practise - current result being equity markets are being inflated again with cheap/free money.(Function of falling dollar also.)

I'm not trying to be confrontational I'm in search of answers. It just looks as if they are resetting the ball...yet again.

I understand they need to cushion the blow with stimulus but the US govt. cannot replace the US consumer(70% of GDP) by throwing good money after bad C4C/building more homes.

Why happened the France/Japan/Opec/Russia/China talks of dollar replacement?

I fully realize and willingly accept I'm out of my league in terms of financial education and apologize MM if this is too mainstreet.

I'll leave it there with my comments. I enjoy your blog.

and no offense intended to you JC, perhaps I shall forever retain irreconcilable differences with regards to prop trading.

leftback said...

Same action, different day. LB assumes that the aforementioned geniuses will keep an eye on the price of crude oil, the one bubble that has the intrinsic potential to burst all the others.

OK, since nobody else has taken the bait: you should really be more comfortable with bubbles, Macro Man, aren't you a West Ham fan, after all?

"I'm forever blowing bubbles,
pretty bubbles in the air,
They fly so high, up in the sky
Then like my dreams, they fade and die.."

Perhaps the Fed should be forced to attend Upton Park on a cold Saturday afternoon in December when the Hammers are snatching defeat from the jas of victory?

Meta Finance said...

Kohn is not alone. Mishkin was in the FT last week arguing that central bankers cannot reliably identify asset-price bubbles; that certain types of bubbles do little harm when they pop; that central bankers should not try to pop such bubbles; and that when in doubt a central banker should err on the side of benign inaction.

One would have thought that the Fed would have learned from past mistakes, but evidently not:

Anonymous said...

Good post MM, was wondering when the Mishkin piece would be called up, pretty disingenuous stuff on the part of the Fed, especially after el Maestro Greenspan almost did a 180 (90? 135?) on bubbles.
Excellent point 2.14, I've been thinking about the extent to which all the OBSI bank liquidity impacted the monetary transmission mechanism for a while. I think it's a real issue that needs addressing.
Ta, JL

leftback said...

Sometimes LB thinks that all the FED heads and the others like Mishkin know that this thing is going to blow up in a big ugly way next year and they are just enjoying the moment and echoing the happy clappy talk for as long as possible. Meanwhile, as long as there is feed in the trough there are going to be snouts getting their fill.

LB had a dream where 300,000 money managers were crowded into three small telephone boxes and then in 2010 they all tried to get out at the same time. When it was all over, all agreed that their strategy "made sense" that they had been "fully invested", the committee had been "unanimous in our views on market dynamics" and at the end of the day, "could not have foreseen the highly correlated reversal in diverse markets", but in any case they had all "beaten their benchmarks".

It was messy for their investors, though....

Our Man in NYC said...

An observation on bubbles; my theory is that for a bubble to propagate there has to be a transmission mechanism to get it from the financial markets to the real world. It can be argued that the Tech/RE bubbles (both of which lasted 4-5yrs) had such mechanisms (tech improved productivity for corps, increasing profitability, and hence a multiplier effect. RE had the home = atm wealth effect).

This bubble, however, doesn't seem to have a transmission mechanism to the real world. In essence, while the cheap financing/QE has gone to financial institutions but it hasn't been passed onto the real economy. It's why I'm going to struggle to believe it's anything but a financial bubble until the C&I Loans figures and Consumer Credit (which are both abysmally bad) suggest otherwise. I'd also suggest, that the lack of a transmission mechanism means that this bubble will likely be shorter in duration than previous ones (due to its reduced ability to become a self-fulfilling prophecy)

Our Man in NYC said...

@JC (12.25pm) -- I'd say "yet" regarding Australia. I don't know enough (yet) to say there will be a crash there, but I'd also say that I don't know if any other country has raised rates while having negative nominal GDP growth!

Anonymous said...

anon at 2:14 PM ... spot on. its a combination of monetary and national/big government/company policy.

bring on that stagflation.

Crisis Management said...

MM, superb entry, very risque perhaps even bordering on apostasy. Thus are the rewards of quasi-anonymous blogging I suppose.

Not to re-flog the dead horse of why do we have a Fed at all, but I simply cannot resist. We had tight Fed policy once upon a time, 20% overnight rates under Volcker.

That episode was an unmitigated disaster. Only through the Volcker Fed's scheme to eliminate usury laws could the system be salvaged. Loose or tight, they are effectively an economic central planning board.

Professional Gringo said...

Yes, definitely one MM's best effort's..evah! Isn't it illegal to quote Krugman here?

How about a heavy MM emphasis on FX tomorrow? The giant vampire squid is calling for a 20% reversal in the dollar's fortunes. I'm having visions of a guy with a spear through his chest that's stuck into a tree.

Anonymous said...

people tend to hate the gold standard- bc its "deflationary" ... its like believing Zues (gold) is somehow less of a God than Jesus (dollar).
i disagree
all gold does is remove this "bubble talk" to the simplest form
1apple = some fraction of gold
a thing for a thing
fiat currencies post bretton woods have nothing to hold them back
so sure greenspan & bernanke, drop rates to zero - its easy... bc whats the diff to them anyways. its not like they need to back it up w gold.

if gold is in a "bubble" - the world has bigger problems to deal with


PPM said...

There are real world impacts. The bubble is encouraging real world risk taking that will destroy real world capital, and someone will have to pay for it. This is the nature of risk. The negative repercussions will impact pensions, retirement plans and insurance companies. These are all large pools of capital that, in the current environment, have no choice but to take on excess risk, to attain their return hurdles. Just because the negative consequences of CB idiocy haven't been made apparent, yet, doesn't mean that there are no negative consequences.


leftback said...

PPM: Excellent post, elegant and succinct argument.

The next change in the environment will have very real consequences for the large inflexible pools of capital ("real money") and will be weathered much more easily by smaller more nimble L/S funds.

jc said...


the reason the Fed and every other serious central banks are loathe to attempt go prick bubbles is because it's a dangerous exercise that could end up leading to depression.

Please see the error of the Fed in the Great Depression and the early 20's depression for an appreciation of why advocating a prick-the- -bubble policy is unworkable. It goes with the history of the real bills doctrine.

reply to further up the post.

The problem with interest rate targeting is that the CB can do either of two things.

intervene in the price of money or determine the quantity. It can't do both. If it targets price then it has no ability to directly control quantity. We shouldn't assume a CB is able to perfectly match price and quantity.

Our Man in NYC said...

PPM -- I don't disagree. My point was more this bubble is in financial assets rather than having direct impacts on Main Street. It's why i don't believe it will last anywhere near as long as the others, but unlike Mishkin I believe that when it pops there will be indirect impacts (and they'll be ugly).

My fear is that bank's start lending before the Fed gives up, and the bubble spreads into Main Street (having direct impact as well as indirect) we start version 2.0 of the last bubble!

LB: As someone who's spent some time at both a FoHF and a HF, it's definitely not as simple as nimbleness being a virtue. Most L/S hf significantly undervalue conceptualizing/understanding risk and PM skills (and overvalue things like deep fundamental research/value investing/network/etc)

getyourselfconnected said...

excellent point! No idea when things are out of hand but they know the exact moment things are down for "irrational" reasons. Great summary of the baloney that is the FED. Remember, baloney is just a big hot dog.

Sensei said...

The Fed Discount Rate was at 5 % from Jan 1996 until Oct/Nov 1998 when it was lowered 50 basis points those two successive months. By Nov of 1999 it was back at 5 % and then raised by May 2000 to 6 %.

My questions: did the 50 basis point rate drop in 1998 precipitate the dot com bubble? did the subsequent 150 basis point increase do anything to mitigate this emerging bubble?

I'm honestly curious. What should the Fed have done in response to the dot com bubble? Jack up rates 300 basis points? 400? Is this really an appropriate use of monetary policy?