Wednesday, November 18, 2009
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....
...as 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.