a member of the Federal Reserve’s policy-making board challenged the notion that financial markets were self-correcting, saying that asset bubbles existed and that central banks could do more to prevent them.
William C. Dudley, president and chief executive of the Federal Reserve Bank of New York, called on policy makers to more aggressively speak out against prevailing wisdom when asset prices fluctuated wildly.
“The costs of waiting to respond to an asset bubble until after it has burst can be very high,” Mr. Dudley said in prepared remarks to the Economic Club of New York. “A proactive approach is appropriate.”
Comments like this make the Fed look like it will more closely follow the views of the ECB. Greenspan was never a fan of trying to prick asset bubbles. The same could be said of Chairman Bernanke. European central bankers have been more willing to look for bubbles; however, it is less clear that they did much with real estate excesses in Ireland or Spain.
Dudley makes a strong case that even if bubbles are hard to identify this is not enough reason to do nothing. There are tools both monetary and regulatory which can be used to slow bubble growth. It takes a willingness to track markets and act if prices move from fundamentals.
Unfortunately everyone knows about the bubble after the fact. It would be helpful if the Fed provides some working rules for how they assess valuation in markets.
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