January 6, 2010 10:36 AM
- Text
Can Federal Reserve Catch Next Bubble?
5925790As the Federal Reserve argues that greater regulatory power could safeguard the U.S. from future financial crises, questions remain about why the central bank didn't foresee the last one.
As the New York Times' David Leonhardt points out, Fed Chairman Ben Bernanke and his predecessor, Alan Greenspan, continually downplayed the nation's housing bubble in the years before it burst and nearly dragged down the U.S. economy.
Earlier this week, Bernanke defended the Fed's monetary policy during the last decade, saying the ever-decreasing interest rates were necessary to lift the country out of recession in 2001. He also dismissed the notion that the Fed's loose monetary policy was behind the unsustainable surge in home values, arguing that prices were rising throughout the world, independent of U.S. interest rates.
What would have made a difference then (and will in the future), according to Bernanke? "Smarter and better" regulation – a theme Bernanke has invoked as he asks Congress, not only for a second term as Fed chair, but also for greater power to rein in financial firms.
While he's expected to win Senate confirmation for another term, Bernanke has run into some stiff resistance regarding the scope of the Fed's authority. Far from expanding it, some lawmakers are looking to limit it – a bill by Rep. Ron Paul (R-TX) would have Congress audit the Fed's decisions on interest rates and Sen. Chris Dodd (D-Conn.) proposed stripping the bank of its supervisory powers and replacing it with three different agencies.
But even if the Fed was granted more power, would it make a difference? Not necessarily.
As Leonhardt notes, the Fed had the authority to crack down on reckless mortgages but chose not to because it essentially bought into the hype about the real estate boom instead of relying on hard data (which was out there) that warned it was a mirage.
That begs the question – How can the Fed ensure future bubbles don't go unnoticed and unchecked?
As the New York Times' David Leonhardt points out, Fed Chairman Ben Bernanke and his predecessor, Alan Greenspan, continually downplayed the nation's housing bubble in the years before it burst and nearly dragged down the U.S. economy.
Earlier this week, Bernanke defended the Fed's monetary policy during the last decade, saying the ever-decreasing interest rates were necessary to lift the country out of recession in 2001. He also dismissed the notion that the Fed's loose monetary policy was behind the unsustainable surge in home values, arguing that prices were rising throughout the world, independent of U.S. interest rates.
What would have made a difference then (and will in the future), according to Bernanke? "Smarter and better" regulation – a theme Bernanke has invoked as he asks Congress, not only for a second term as Fed chair, but also for greater power to rein in financial firms.
While he's expected to win Senate confirmation for another term, Bernanke has run into some stiff resistance regarding the scope of the Fed's authority. Far from expanding it, some lawmakers are looking to limit it – a bill by Rep. Ron Paul (R-TX) would have Congress audit the Fed's decisions on interest rates and Sen. Chris Dodd (D-Conn.) proposed stripping the bank of its supervisory powers and replacing it with three different agencies.
But even if the Fed was granted more power, would it make a difference? Not necessarily.
As Leonhardt notes, the Fed had the authority to crack down on reckless mortgages but chose not to because it essentially bought into the hype about the real estate boom instead of relying on hard data (which was out there) that warned it was a mirage.
That begs the question – How can the Fed ensure future bubbles don't go unnoticed and unchecked?
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