• Federal Reserve Arrogance

      Government's desire to do more is spilling into the stock market. The new NY Fed director says that he should be allowed to identify and speculate against market "bubbles." What arrogance. Donald Luskin sums it up in today's WSJ:

      William C. Dudley, the ex-Goldman Sachs economist just appointed president of the New York Federal Reserve, has upped the ante. He thinks the Fed should be responsible for identifying and preventing asset-price bubbles. Considering that the Fed’s track record reveals more skill at causing bubbles than preventing them, this is a very dangerous idea. ...

      Mr. Dudley claims that “Asset bubbles may not be that hard to identify—especially large ones” and suggests “additional policy instruments”—that is, new regulatory powers for the Fed to “more directly influence risk premia.” Because risk premia are a key element in determining asset prices, Mr. Dudley is effectively asking for the power to control asset prices. ...

      He notes confidently, by way of example, that “the housing bubble in the United States had been identified by many by 2005.” Well, that’s true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices. ...

      Consider Mr. Dudley himself. In a 2006 speech at a conference of the National Bureau of Economic Research, when he was still with Goldman Sachs, Mr. Dudley listed “five bubbles that one could reasonably have identified in real time.” He said that he’d “tried to speculate against three of the five bubbles” but confessed his speculations met only “with limited success.”

      Even if Dudley had a stellar track record, I would say: Investors should feel free to give him their own money to invest against stock bubbles, but he shouldn't be able to use government force to take the public’s money to try to set asset prices.

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      Pre-October 2009