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Federal Reserve Says “One More Drink”

Posted by Larry Doyle on December 2, 2009 2:31 PM |

Illustration by Zhou Tao

I have to admit, I chuckled upon reading the news today that the Federal Reserve is debating whether and how it may fight the prospects of asset bubbles developing. The Wall Street Journal addresses this story in writing,
Fed Debates New Role: Bubble Fighter:

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.

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 the same time, pending legislation in the House could leave Mr. Bernanke running a less independent institution. The House Financial Services Committee has passed a measure that would subject the Fed’s interest-rate decisions to scrutiny by the Government Accountability Office, an investigative arm of Congress. Mr. Bernanke and others at the Fed fear that with Congress looking over their shoulders, any decision they make about interest rates would be subjected to the winds of politics — making it harder to control inflation or financial bubbles.

My immediate thought upon reading this article is to think of the bartender who is happy to push one more drink upon an overlubricated patron. Or perhaps a junkie who is willing to sell a down and out addict one more fix in order to ease the pain.

The fact is the Fed knowingly and intentionally has worked to rebubble our markets via its easy money policy. This easy money, coordinated with the Fed’s quantitative easing and fiscal policies promoted by Treasury, has reflated the markets while our downtrodden and depressed patrons are drowning their sorrows.

Pushing “one more drink” onto a patron or system that has serious fundamental issues is not now, nor has it ever been, an appropriate policy.

To think the Fed can detect and manage future asset bubbles after creating the past and current bubbles would be comical if it weren’t pathetic.

LD

  • AllanRBrewer

    I would think that the best defence against bubbles would be lots of open public discussion, transparent data, questioning, media coverage and consequent increasing investor sophistication – after all the investor is responsible for making the buy and some will inevitably get hurt when the bubble ultimately bursts – does the state really need to intervene to protect investors from their own risk-taking or stupidity? Other, of course, than to insist on iteration of the personal risks, and regulate against systemic risks or the giving of bad advice? Admittedly the housing market is much more complex but again could only benefit from continuous discussion and comment about whether housing prices are realistic.
    Personally though, I must admit that I am eagerly awaiting the moment to start shorting gold!

  • TeakWoodKite

    I am concerned LD about the House (of cards) looking to get a foot hold at the Fed.

    “Float like a butterfly, sting like a bee.”

    The fed is doing a “rope a dope.”
    By now, it must be exedingly difficult for sane voices there to gain traction.
    Question for you LD, out of all the Fed governers, which one is on the ball of late?

    • Larry Doyle

      I think the Fed governors try to provide some semblance of sanity with reasoned comments so that they appear to maintain credibility, BUT there are still times when I hear them speak and cry foul.

      Of the 5 governors, I have to admit I have heard little from the only woman, that being Elizabeth Duke. Kevin Warsh seems fairly reasoned. Kohn and Tarullo strike me as toeing the party line.

      Final answer: Warsh. Best Fed President: Thomas Hoenig in KC

  • Mike

    Larry,

    Did you see Sen. Jim Bunning tear Bernanke a new one during the senate banking committee meeting today? I was waiting for an applause after he finished talking…

  • Larry Doyle

    I did not see it live but I did read his testimony. Lots of good stuff there. Where are the other members of Congress? Bunning is steadfast in his position but why do other members of Congress only seem to find this religion when politically convenient.

  • Mike

    Probably because many members of congress are in somebody’s pocket. God bless politicians like Bunning and Ron Paul.






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