Greenspan's credo revisited

A Bloomberg article addresses the question of the Fed's role in averting and managing asset price bubbles. In the light of the recent developments or should one say the last ten years, which have seen more bubbles and fewer calm periods in between, the public's desire for more regulation is getting stronger. The tide seems to be turning. Minneapolis Fed Bank President Gary Stern in a recent speech said that it is possible "to build support" for practices "designed to prevent excesses." This is a remarkable development although it remains to be seen how far it goes. The achievement would have to be heroic in the light of Greenspan's credo that it can't be done , the deflation of asset bubbles that is. The honesty of the former chairman in this regard has to be questioned for two reasons. First, asset bubbles are created by easy monetary policy which favors investments over savings. The role of the government is substantial here as well. That leads directly to the second point, the issue of independence of the Fed, which can be questioned to say the least. The Fed's dual mandate of price stability and optimal growth is a bogus mandate and inevitably leads to a conflict of interest between government officials in Washington and the monetary policymakers at the Federal Reserve. It is for that reason that other central banks around the world have not adopted this approach. To change the shameful culture that has permeated into the halls of Wall Street and the Federal Reserve it certainly would take an effort of massive proportions. The focus of the Fed on its real mandate of price stability alone would be a first step in the right direction. The alternative of insufficient action or in the worst case doing nothing would be disastrous and the outcome of systemic financial failures a sure thing.

As a reminder the Greenspan credo:
For two decades, the ruling philosophy has been Greenspan's. ``It is far from obvious that bubbles, even if identified early, can be pre-empted at a lower cost than a substantial economic contraction and possible financial destabilization,'' Greenspan told the American Economic Association in 2004.

``I have always said if we could defuse a nascent asset bubble, I would be all for it,'' Greenspan, 82, said in an e- mailed response to a question yesterday. ``The reason I am against is that in my experience it cannot be done. I know of no occasion when such actions have been successful.''



source:
Fed May Rethink Greenspan's Hands-Off Approach Towards Bubbles
By Craig Torres and Vivien Lou Chen
http://www.bloomberg.com/apps/news?pid=20601170&refer=
special_report&sid=aHacfhqvht2Q