Sunday, March 30, 2008
This two-year old magazine cover from The Economist popped up again somewhere the other day - it's worth having another look at both the cover and the lead story($).
It took quite a bit longer than many thought for real problems to finally materialize, but the questions raised in January of 2006 are certainly pertinent now.
How should Mr Bernanke respond to falling house prices and a sharp economic slowdown when they come? While he is even more opposed than Mr Greenspan to the idea of restraining asset-price bubbles, he seems just as keen to slash interest rates when bubbles burst to prevent a downturn. He is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall. This is dangerous as it encourages excessive risk taking and allows the imbalances to grow ever larger, making the eventual correction even worse. If the imbalances are to unwind, America needs to accept a period in which domestic demand grows more slowly than output.Memories ...
This week's cartoon from The Economist: