Former IMF chief economist Simon Johnson picks up on some comments from NY Fed President William Dudley that were released during the 4th of July weekend and may’ve fallen under the radar.
Dudley says the Fed can pop or prevent asset bubbles from developing. According to Washington Post:
The Fed’s view has been that bubbles can be identified only in hindsight, and that all the central bank can do is prepare to clean up after they burst. The current crisis shows that policy is mistaken, Dudley said.
“Asset bubbles may not be that hard to identify,” he said. “This crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high.”
Nevertheless, Johnson remains skeptical.
“This would represent a major change in the nature of American (and G7) central banking. It’s a huge statement - throwing the Greenspan years out of the door, without ceremony,” he says.
But if the Fed can’t get better at spotting bobbles, can anyone else? And will too-large-to-fail institutions still exist during the next bust, Johnson ponders.
“You cannot stop the tide and you cannot prevent financial crises,” he says. “But you can limit the cost of those crises if your biggest players are small enough to fail.”
