Economists clash over way to deal with future asset bubbles
Central bankers and economists at a US Federal Reserve symposium have clashed over how to best contain asset-price bubbles three years after a crash in US housing prices led to the global recession.
Bank of England deputy governor Charles Bean told the meeting in Jackson Hole, Wyoming, yesterday that regulatory tools would be most efficient at deflating a boom without inflicting broad economic damage.
Stanford University Professor John Taylor, creator of an interest-rate-setting formula used by central banks, said the tools were "unproven" and that using them may cause central bankers to lose focus on adjusting rates properly.
"In a sense, the Fed caused the bubble" in home prices, said Taylor, a former US treasury undersecretary for international affairs. "A priority would therefore be not to create bubbles in the first place," he said.
The disagreement highlights the challenges Fed chairman Ben Bernanke and other central bankers face as they seek to sustain the global recovery through unprecedented stimulus measures while not encouraging investors to take excessive risks.
Kansas City Fed president Thomas Hoenig, the conference's host, has warned this year that the Fed's near-zero rate policy risks creating new, potentially destructive price bubbles.
The discussions are especially timely because of possible bubbles in US treasury bonds and housing debt that may expose investors to the risk of an interest rate increase, Harvard University Professor Martin Feldstein said during a conference break.
"It could well be that anybody's who's buying 20-year, 30-year treasuries is taking a big risk," he said. "Those prices could come down. I think the Fed is keeping those rates below any kind of long-term equilibrium."
The debate followed a presentation the previous day from Northwestern University Professor Lawrence Christiano, who said the Fed should consider smoothing US stock market booms by tightening monetary policy in response to credit growth.