Mark Thoma Consults His Inner Hayek
Mark wonders what to do:
Real Time Economics : Secondary Sources: TARP and Democracy, Cascading Failures, Bubbles: Fed and Bubbles: Writing on TPMCafe, Mark Thoma looks at the issue of the Fed’s pre-emptive busting of asset bubbles:
The Fed needs a rule like it uses to guide its decisions about the federal funds rate, a rule that compels the Fed to respond to asset prices early enough and forcefully enough to prevent catastrophic bubbles from developing. For example, the Fed could add an asset price index to the rule for the federal funds rate so the federal funds rate responds to asset prices in addition to responding to inflation and output. But that is not the only approach, the point is to create an automatic procedure that can be followed (and used as cover against criticism) so that we don’t wait too long to step in when asset prices begin to escalate...
