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Friday, December 19, 2008

Talk is Fine, but Rules are Needed Too

One more at TPM Cafe Book Club:

Talk is Fine, But Rules are Needed Too, by Mark Thoma: Dean Baker says that Alan Greenspan should have used his public appearances to warn people about the stock and housing bubbles, and if he had, the bubbles would not have inflated to such dangerous levels.

I don't have any problem with Dean's suggestion that talk matters. I'm not sure Greenspan could have been convinced there was anything more than "froth" in housing markets, and that's part of the problem with this approach, and one reason why I like rules that move against rising asset prices automatically rather than relying upon the discretion of Fed officials. But if somehow Greenspan had been convinced that a dangerous bubble was developing, and he was confident that he was correct in this assessment, sure, he should have sounded the warning.

But what if he was wrong about whether there was a bubble (and he was)? What good does it do to have the Fed chair saying there's no problem, go take out a variable rate mortgage and live happily ever after? With all of Dean's criticisms about economists missing bubbles, why is he confident the next time will be any different? And who will believe the Fed chair the next time anyway given how wrong Greenspan was? That's another reason I prefer rules that move against prices automatically, they don't require that people doing the talking be believed.

But my main problem with this approach comes with the implicit suggestion that one person, the Fed chair, should hold so much power within the Federal Reserve system, that it was Greenspan's job alone to sound the warning. ...[...continue reading...]...

    Posted by on Friday, December 19, 2008 at 11:07 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (13)


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