David Leonhardt in the NY Times has an article today asking the question the financial blogosphere has been repeating for many many months: "If the Fed missed this bubble, will it see a new one?"
"The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?"
Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt - pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble."
Although the financial blogs I read daily have pounded this point mercilessly for the better part of a year, it's still good to see it voiced in the mainstream press.
-KD
1 comment:
In his recent Atlanta speech, Bernanke makes a strong case that monetary policy by itself didn't cause the run up in home prices. And he's right to a degree: changes to the Fed Funds Rate and FOMC operations influence the leverage available to home buyers, but they have no real effect on lax underwriting standards and exotic mortgage features. B does recognize that 'accommodative monetary policies' (lowered rates) usually reduce capital inflows (which are correlated with home price appreciation). Yet this wasn't the case! (Why wasn't this alarming when it happened?) So he asks: "We need to understand better why some countries drew stronger capital inflows than others." Come on Mr. B... it doesn't take a dissertation to reason this one out. It's CURRENCIES. It's not surprise that most current account surplus countries are also touting export-led growth strategies. In normal times, trade surpluses are accumulated in some foreign currency that are then sold. Selling one currency to buy another causes movements in exchange rates and consequently interest rates. The net-importer's currency depreciates and his interest rates rise, whereas the net-exporter's currency appreciates and rates move lower. Yet, current-account surplus countries aren't selling their surpluses, but converting them into reserves, which works to effectively maintain the old exchange rate (usually, to maintain some kind of competitive advantage - mostly, cheaper labor). Hence, foreigners were/are buying America, UK, Spain, etc. regardless of their central bank rates. The game is trade. That's why American inflows weren't falling despite easy monetary policy.
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