Greenspan Says Policy Not Intended to Prick Bubble

Just say no to bubble-pricking:

Housing Prices Aren't Fed Target, Greenspan Says, By Greg Ip, The Wall Street Journal (subscription): Recent warnings by bank regulators on risky housing-related lending aren't meant to rein in a potential bubble, Federal Reserve Chairman Alan Greenspan said.  "The regulatory system is not designed to influence or control asset bubbles, but rather to ensure that bubbles, should they develop, do not lead to unsafe lending practices," Mr. Greenspan said in a letter to Rep. Jim Saxton (R., N.J.), chairman of the Joint Economic Committee of Congress.   The remarks … show the Fed has rejected using either of its major tools -- monetary or regulatory policy -- to rein in housing prices. … Mr. Greenspan has long rejected the use of interest rates to tame asset bubbles, such as the stock bubble of the 1990s. He has argued that bubbles are difficult to identify in advance and reining them in may require interest rates so high that they do more damage than a burst bubble. Still, some have speculated the Fed might use its regulatory sway over banks to tamp down the mortgage lending … the Fed … warned lenders about interest-only home-equity loans, loans made with little or no documentation of the borrower's credit-worthiness, and higher loan-to-value and debt-to-income ratios. Similar guidance on mortgage loans is expected.  But Mr. Greenspan said the guidance isn't a form of bubble-pricking. "It was a response to indications that some banks were not appropriately managing risks in the home-equity area," he wrote. The factors cited by regulators in May "have not necessarily had a material effect on housing prices. …

For more on this, See David Altig, Prudent Investor, and Caroline Baum