Financial Times (Letters), 9th April 2008
Sir,
Alan Greenspan’s article on 7th April in the Financial Times, headed “Don’t blame me” on the front cover, resembled an errant Fire Brigade excusing itself for failing to attend, let alone extinguish a fire, on the grounds that it hadn’t started it and, despite being the monopoly supplier of paraffin to the neighbourhood, were in no way responsible.
But as the articles on the same page by Clive Crook and Wolfgang Munchau show, the damage done by the Federal Reserve in ignoring asset prices, unless they were falling, has been made clear by the current financial crisis.
The importance of asset prices is now agreed and central banks therefore need to be able to recognise their excesses and know how to respond to them. While not simple, it is easier to recognise an asset bubble than to measure, in real time, the size of the output gap, on which so much emphasis is placed by many central bankers.
There are many possible responses. One is that central banks should be able to reduce their inflation target if they become concerned about asset prices. On both issues of asset values and appropriate action to excesses, greater debate and study are badly needed.