Bernanke suggests a shift at the Fed on bubble-busting

Imagine a bubble-free future for the economy and financial markets.

Nah -- not gonna happen.

Nonetheless, Federal Reserve Chairman Ben S. Bernanke today suggested that there may be a role for the central bank in trying to keep dangerous bubbles from developing.

Here’s what the Fed chief said during a Q&A after a speech in New York, per Bloomberg News:

Bernanke said the central bank will consider discarding its long-standing aversion to interfering with asset-price bubbles.

Officials should review how supervision and interest rates can minimize the "dangerous phenomenon" of bubbles in housing, stocks and other assets that risk bringing the financial system and economy down with them when they burst, Bernanke said.

"There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it," he said.

Bernanke said he believed that "supervisory and regulatory policy" had a "significant role to play in constraining excessive leverage of risk taking and the other elements that lead to bubbles."

Translation: Washington should make sure that Wall Street never again takes on the kind of leverage that got us to this sorry state. But that's pretty much a given, at this point.

Of course, everyone now can see, after that fact, that it was a mistake to allow the housing bubble to become so gargantuan. But when you’re in a bubble, almost nobody wants it to end. It’s human nature.

The Calculated Risk blog today noted Bernanke’s comments and also reflected on former Fed Chairman Alan Greenspan’s famous laissez-faire view on bubbles.

Greenspan in 2002, per Calculated Risk:

"If the bursting of an asset bubble creates economic dislocation, then preventing bubbles might seem an attractive goal. But whether incipient bubbles can be detected in real time and whether, once detected, they can be defused without inadvertently precipitating still greater adverse consequences for the economy remain in doubt."

Those comments were in regard to the dot-com bubble and its aftermath.

Greenspan’s Fed at that point was well on its way to cutting short-term interest rates to 1% -- setting the scene for the biggest bubble of all time in U.S. housing.

Photo: Ben S. Bernanke (Andrew Harrer / Bloomberg News)

Comments

[Robert NO longer in LA]

As long as our incumbent political parties are bought and paid for by Wall Street, Pig Oil, drug-pushing Pharma, the military-industrial complex, and yes, Silly-Con Valley with it's ILLEGAL H1B visas for slave labor and managements' outsized rewards, the working/retired people of this nation are in grave peril. Now don't forget to go out and RE-elect the incumbent who DESTROYED your economy, your job, your future....and even, your childrens' futures.

[notsoandso]

The lenders need to look in the mirror to solve some of the lending crisis.
Freddie & Fannie have rules as to the percentage of past due accounts a Home Owners Association can have or they will not buy the new buyer’s loan. When lenders foreclose on a property they do not keep the property taxes or the HOA dues current until they sell the property & close escrow. The REO properties will have additional late fees and penalties. OK if they want the extra fees I guess that's their choice. Here's the additional stupid part. If there are too many delinquent properties the lender will not do the new loan. I was recently involved in a transaction that if the REO properties were current on their dues the HOA complex would be OK. The 15 delinquent REO properties meant the HOA did not meet the Freddie & Fannie guidelines. The HOA has substantial reserves but that did not matter, the guidelines are the guidelines.

The buyer qualified – the property did not because the lenders are not paying their HOA dues.

[Steve]

What is amazing about this debacle is how little blame Greenspan gets for the cause of this.

[James Monachino]

Fed Bubble - -

Human nature proves again that even in a free society you still need rules and oversight to protect the individual and in turn the community from excessive profit driven behavior. The law of the jungle may work well for the animal kingdom but it certainly doesn't benefit civilization regarding the depth and breath of cyclical economic and social damage it creates for human society.

Words such as social justice and fair play seem to ring hollow as we enter this deflationary multi-year re adjustment phase. Full of debt, doubt, and a fuzzy vision of what is to come I wonder if we will learn anything from this brutal downturn we are about to experience.

With trillions of dollars draining out of the International and Domestic stock markets and liquidity moving like thick mud down stream I find no satisfaction
in discovering that no laws were broken. In Addition, instead of trying to roll up our sleeves and addressing the real estate crisis at the loan level we are providing luxury life boats for the few unfortunate multi billionaire players and institutions so they can exist the stock market in the form of an equity bailout of select institutions.

Federal Reserve Chairman Ben S. Bernanke states the obvious regarding the Bubble and as an expert of the Great Depression I am sure he realizes more than most the delicate and perilous situation we are in. Good luck Ben, you are walking into history holding hands with Greenspan regarding the commencement of the 2nd Great World - Wide Slow Down with derivatives becoming the Tulip Mania of the 21st Century.

James Monachino

[Greg]

This wasn't a bubble it was wide spread mortgage stupidity induced by a bunch of slimy salespeople. A global pyramid scheme.

[Steve]

Hello?

Didn't we say that back during the Great Depression. Massive over-leveraging killed the banks then. The deregulation of the financial markets in 1999 allowed unregulated markets to run rampant. Now we have another massive over-leveraging problem. When will we ever learn?

The love of money (aka greed) will prevent us from permanently learning from this periodically painful problem.

Bernanke is an idiot if he thinks he can rein in those who are so incredibly greedy they will stop at nothing to make money. He can no more prevent massive over-leveraging crisis than I can fly to the moon.

[Guesswhotoo6]

Bubble busting? The bankers engineer the bubbles, they are a direct result of having a fiat currency and a central private bank. They serve the private bankers purpose of delivering wealth from the masses to the few individuals who have the ability to print money/credit and control interest rates. Bernanke will no more control bubbles than the next guy in his shoes. He simply needs to make everyone feel good while continuing to inflate our now worthless currency. In the end, this will be a struggle between We The People and the bankers. At some point soon, there will be no room to add interest to already mounting debt simply because there is insufficient ability of the people or available collateral to pay or substantiate the amounts necessary to keep the show going.

[Marion]

Bubbles are good.

Bubbles (housing, tech stock, etc) are like spicy good that tastes good going down, but generate a serious case of diarrhea and projectile vomiting (a recession). It is only by these cleansing activities that our systems (markets) restore their equilibrium.

There can be no "ups" without "downs." Stagnation is not an option. Unless you want to live in Cuba or North Korea!

[Mark Anderson]

Considering the fact that it is impossible for the Fed to deflate what it hasn't first inflated, the ONLY tool of the Fed is TOO inflate and manipulate interest rates downards. Sure, after the Fed creates damage during an inflationary boom, leaving our savings dried up, the Fed can step and raise interest rates. But again, why inflate to begin with?

The only way to prevent bubbles, then, is to let the market produce and select money. We MUST return to sound money. We need FREE BANKING, UNRESTRAINED BY THE GOVERNMENT. Let the market create banks that use gold and silver to make transactions in.

The Federal Reserve has created a huge bubble over the last century. In the early 1900's, one could build a mansion for about $15,000. In the year 2000, those houses would sell for $750,000. Thanks a lot, Federal Reserve. Thanks a lot, Congress.

GIVE US LIBERTY!