Sunday, August 29, 2010

Jackson Hole: The Fed Caused the Bubble; Beware the New Bubble in Bonds

John Taylor, Stanford University Professor and a former Treasury undersecretary for international affairs, said that “In a sense, the Fed caused the bubble” “A priority would therefore be not to create bubbles in the first place,”

Bloomberg reports that central bankers clashed this weekend at their meeting at meeting in Jackson Hole, Wyoming. One of their main arguments was oj how to best contain asset-price bubbles.

Charles Bean, Bank of England Deputy Governor argues that that regulatory tools would be most efficient at deflating a boom without inflicting broad economic damage. John Taylow, however, says they are unproven.

Thomas Hoenig, Kansas City Fed President, had also warned this year that the Fed’s near-zero rate policy "risks creating new, potentially destructive price bubbles".

The current Bond bubble: Martin Feldstein, Harvard University Professor, said: “It could well be that anybody’s who’s buying 20-year, 30- year Treasuries is taking a big risk,” “Those prices could come down. I think the Fed is keeping those rates below any kind of long-term equilibrium.”

Bean: “Monetary policy is too weak and ill directed to moderate a credit and asset-price boom without inflicting unacceptable collateral damage,” “Instead if central banks want to manage credit growth and asset prices in order to avoid future financial instability, another instrument is necessary, and that’s obviously macroprudential policy.”

Agustin Carstens, governor of Mexico’s central bank said that the effectiveness of rates against a bubble may depend on how much of it was due to financial advances: “The bubble that we saw was based on huge innovation,” Without such advances, the sensitivity to interest-rate movements “would be quite different.”

Bloomberg concludes that the disagreements among the attendees, which included central bankers from more than 40 countries, may not be resolved any time soon.

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