Wednesday, December 02, 2009
It's shaping up to be an interesting day tomorrow when Fed Chairman Ben Bernanke sits before the Senate Banking Committee to hear what elected officials have to say about him serving another four years at the helm of the central bank.
While some liken his first term to being the captain of the Titanic, Bloomberg reports that a majority of the 24 member committee have already made their intentions clear to have Bernanke reappointed and the Wall Street Journal fills in some of the details about how Fed policy might change over the next four years in this story.
Not so long ago, Federal Reserve officials were confident they knew what to do when they saw bubbles building in prices of stocks, houses or other assets: Nothing.The idea that the Federal Reserve will someday use its powers to "stamp out bubbles" is one of the funniest things I think I've come across all year.
Now, as Fed Chairman Ben Bernanke faces a confirmation hearing Thursday on a second four-year term, he and others at the central bank are rethinking the hands-off approach they've followed over the past decade. On the heels of a burst housing-and-credit bubble, Mr. Bernanke now calls financial booms "perhaps the most difficult problem for monetary policy this decade."
With Asian property prices soaring and gold prices busting records almost daily, the debate comes at a critical time. Mr. Bernanke wants to use his powers as a bank regulator to stamp out bubbles, but the Senate Banking Committee, which will grill him later this week, is considering stripping the Fed of its regulatory power.
At this point, most people would probably be happy with any government or quasi-government agency just preventing the world's financial system from circling the toilet bowl.
Right now, a jobless recovery is starting to look pretty good in light of other debt-spiral possibilities that seem to be all the more possible after the Dubai World news last week.
Fed officials used to think there was little they could or should do to prevent bubbles from inflating. For one thing, identifying bubbles with any certainty was deemed to be too difficult. And even if they could be accurately pinpointed, pricking them might do more harm than good. Raising interest rates to stop a bubble, for instance, could slow growth in other parts of the economy that were otherwise healthy.Uh... No, it didn't.
The Fed's main strategy instead was to mop up after a bubble burst with lower interest rates to cushion the blow to the economy and restart growth. That strategy was a key conclusion of Mr. Bernanke's writings on the subject of bubbles when he was a Princeton professor, and again when he first came to the Fed as a governor in 2002. It was an approach embraced by his predecessor Alan Greenspan.
Now, Fed officials admit the stance didn't work.
This report goes on at great length discussing the future of both the central bank and U.S. financial markets as it relates to avoiding a repeat of the late-2008 meltdown.
Interestingly, in a Journal Community poll that asked whether the Fed should take action to deflate stock, home price, or other asset bubbles, respondents replying yes had only a slim lead of 51.5 percent to 48.5 percent.