Columns:: Worth repeating

since 12/15/98

Columns::February 24, 2003

Worth repeating

During the Feb. 12 Charter Lecture, Roger W. Ferguson Jr., vice chair of the Federal Reserve Board of Governors, discussed the balancing of goals and methods required of central banks such as the Fed. An excerpt:
“Many have characterized the extraordinary rise in stock prices in the late 1990s as a bubble--a significant and protracted departure in asset prices from fundamentals--and the subsequent decline as a popping of that bubble. Our recent experience has given renewed spark to a vigorous debate about the appropriate response of monetary policy to financial bubbles.
“Now, economists agree that bubbles can impair the functioning of the economy, by promoting a misallocation of resources when they are inflated and also by provoking severe dislocations when they pop. But, because we are talking about economists . . . you can be sure their opinions differ substantially after that point of agreement.
“One branch of economists holds the view that monetary policy should not be enforced by perceived financial market troubles. The extreme view at the other end holds that central banks should pop bubbles as soon as they can.
“My view falls somewhere in between the two extremes. On the one hand, I am skeptical that central bankers--or anyone else--can accurately identify bubbles as they are inflating. On the other hand, the argument does tend to take into account the effect of asset management on the economy in setting interest rates and does consider the likely reaction of asset prices to our policy decisions.”

--Beth Roberts

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