>The Fed can cool off a bubble without having to raise interest rates
>and thereby dampen other economic activity. For example, to deal
>with the housing bubble, all the Fed Chairman would need to do is
>explain the reality: since 1996 house prices nationally have
>increased more than 45 percentage points after adjusting for
>inflation. From 1950-1995 house prices increased at the same rate
>as inflation. It is easy to show that this sharp break with the past
>is the result of a speculative bubble. If the Fed won't do this, who
>will?
Eh? Just pointing out this fact would deflate the bubble? And deflating the bubble would have no effect on real activity? But housing has been responsible for a major share of employment growth over the last few years, and borrowing against appreciated house values has fueled a lot of consumer spending. If an asset bubble is stimulating real activity - as the stock bubble did in the late 1990s, and as the housing bubble has done in the early 2000s - then "other economic activity" is going to have to take a hit.
Doug