In remarks released this morning by the Federal Reserve, Bernanke said regulators (and private economic participants) are going to have to do better at risk control. The AP reports the speech as saying regulators have the power to stop bubbles before they happen. What? Is government supposed to be smarter than a market of tens of millions of actors doing what they think is best for themselves?
Bernanke said that the recent economic crisis might have been the worst in modern history but that the Fed was probably right in being so “accommodative” in monetary policy in the first half of the Naughties. (Here is the AP's report on the speech as it appears on the New York Times' website.)
In a speech to the American Economic Association’s annual meeting today, Bernanke said the dot com bust and the “jobless” recovery in 2003 that followed the brief and “moderate” recession of March to November 2001 required the then-historic low federal funds rate of 1 percent for a year—an action which many say was the real fuel behind the housing bubble. (Of course, other government institutions and quasi-government institutions also urged for easier lending practices by private lenders.)
In his speech he says private actors and government regulators need to have better risk controls to stop excessive risk taking from getting truly out of hand. He says monetary policy is a tool and that regulators must do more to prevent speculative excesses in the market place. But I get from his speech that no one can stop speculative excesses, not even central bankers or other government regulators. After all, they missed this one, the Biggie. Well, then, I suppose regulators/governments could, but they might also stifle economic growth—which he says justified the Fed’s accommodative stance in the early Naughties.
But how can you do that? Which regulators exactly using which particular metrics? (Bernanke cites the Taylor Rule on monetary policy as one too.) Besides a lot of people—including this magazine—were calling real estate speculation a bubble way before the bottom fell out. But how can a cabal of global government bureaucrats prevent speculative manias? I am trying to imagine a Wizard of Oz like committee, perhaps even global, linked by the Internet, trying to control asset prices from “getting out of hand.” Can you imagine what a nightmare that would be?
Human interaction is too complex—asset prices, markets—are too complex for a group of unelected bureaucrats to try to control. Price fixing doesn’t work.