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Should the Federal Reserve take action to deflate stock, home-price or other asset bubbles?




What do you think? Should the Fed attempt to deflate bubbles through interest rate adjustments or other measures?  How can they be sure to correctly identify booms, which are best viewed in hindsight?  What are the pitfalls if they become more proactive?

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  • The fundamental premise of the question is flawed, so how can one answer it. You say they are re-thinking their "hands-off approach". The WSJ has been one of the few places writing for years that the Fed keeping interest rates artificially low (and also de-valueing the US$) was going to end badly -- which it did. How can you now pose a question that premises that they've been hands-off?



    The Federal Reserve is a serial bubble inflator; how can the chief creator of bubbles be expected to regulate bubbles? The Fed by its very existence misallocates wealth. The poll is a false choice: there needs to be a third option--dismantle the Fed.


  • Frank and James said what I would have said.


  • Is there any wonder that investors are worried about our financial markets as government debt skyrockets and the dollar devaluation and the carry trade continues by the actions of the Fed and our Treasury? The WSJ reports that a world study shows that there are over 500 major banks in the U.S. and Eurozone that are undercapitalized. Our Fed urges our banks to increase capitalization at the same time it urges them to lend more. And it does this while holding interest rates as low as possible continuing to devalue the dollar while the low rates signal that the Fed fears that we will slip back into recession more than it fears inflation. And the counterproductive goals and actions go unremarked in the major press and not debated in government. It was only last week the Fed again announced it would keep interest rates low for the foreseeable future and today the WSJ features a story that the Fed is now considering taking action to deflate a bubble. What has the market always feared the most? Experience shows it is uncertainty and surprise. And what is the major task of good executive management? My training taught me it was to prevent surprises and uncertainty. Bottom line in my view is that we have government executive management that is not up to their task of calming our markets and leading us out of recession in a logical and orderly manner. In that environment, the WSJ asking whether the Fed should act to prevent bubbles or not is a specious question. Whichever decision the government makes in their present state of fear and confusion may well damage the markets further.



    I see a couple problems with allowing the FED to do anything to the market. The first is the fact that it will not do anything to correct the bad legislation that creates these problems in the first place. For example, the 1999 Financial Services Modernization Act (FSMA) is what created our current "crisis." Prior to the repeal of The Glass-Steagall Act of 1933, it will illegal for any one company to own a commercial bank, and investment bank, and an insurance company. That would be the companies that made the original paper, bundled them for investment vehicles, and then insured them. In 1933, they were wise enough to know that the right hand really did need to know what the left hand was doing. And of course, to pass the FSMA the democrats insisted the bill contain legislation that would make it easy for people who did not qualify for a flat rate, fixed term mortgage to get into a house anyway. Of course this piece of work said nothing about keeping the mortgage affordable once they got into the home. The mortgage types that bankers came up with were a boon for real estate speculators who wanted to "fast flip" houses, but they should never have been used to finance a single home for someone who actually wanted to live in the home. Second, as to regulating the stock market to prevent bubbles - this isn't their job. The SEC needs to come up with better rules requiring the market to actually reflect the real world valuation of companies. A good example of a stock whose valuation has no bearing on reality is Google. While it has been a great investment for a lot of people - it is a software company and their largest asset is their search engine, and their revenue stream is advertising. There isn't another software company whose stock valuation comes even close to Googles, and other Ad Agencies make as much revenue - their valuation isn't close to Google's either. So is the $587 price per share based on anything real? Mix this with speculative day trading of both stocks and commodities and bubbles will abound. I know that I am not the only American who is fed up with the overly inflated prices of commodities like oil and wheat raising the prices on gas and bread. No, it isn't a job for the FED. The senate needs to be held accountable for badly written legislation, and the SEC and the CFTC need to do their jobs.



    As Frank and James said: The Federal Reserve is the pump which blows up the bubbles. The question is flawed. The Fed should stop "managing" the money supply.

    A genuinely free market depends on honest free-market money. Tinkering with the supply of money and the interest rates is what causes the boom-bust cycle. The Fed is setting us up for another bust, all the while professing ignorance as to their central role. They are either dangerously stupid or dangerous liars; take your pick.



    Well somebody should, but since neither the Fed, the Treasury, the SEC or the Congress took steps to deflate them in the past, what makes you think you can trust ANY government agency to competently regulate the greed and simple-mindedness that passes for "ability" on Wall Street???


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