>Marta Russell quoted Mark Weisbrot:
>
>>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.
Mark Weisbrot responds:
>yes of course you are right, popping the bubble now would have a big
>negative impact, it should have been done a lot earlier and of
>course the bigger it grows the worse the impact when it pops. My
>point here was that the Fed could have popped the bubble earlier
>without raising interest rates, and should have -- very often a
>false choice is presented, as though the Fed can only raise interest
>rates if it wants to deflate/prevent asset bubbles.