Tuesday, May 20, 2008

Can the Fed prevent bubbles?

This is the hope of Federal Reserve Chairman Benjamin Bernanke. He has hired some old chums of his from Princeton to study the matter. Bubbles are inevitable and like the Bible says of the poor, will always be with us.

If I had to guess as to why a supposedly free-market economist would have an interest in acquiring such powers I would venture two guesses. One, Bernanke is a student of The Great Depression. This is the basis of his fervent anti-deflation bias, and the reason for his famous helicopter speech from 2002. For Bernanke, deflation is the anti-Christ. The second reason for this thinly-veiled power grab is that no matter how much economists believe in free markets, they are also humans who enjoy power and prestige. I have never known a government official to dislike power or influence(George Washington is the lone example I can think of).

Bernanke has not been alone in pursuing more power for The Fed. He has had helps from the highest office in the land. At the end of March, President Bush outlined a plan that would significantly overhaul the financial regulatory apparatus of the country, "the Fed would sit at the top with expanded responsibilities as the 'market stability regulator.' But the Fed would lose its current powers over bank holding companies."

Such a broad description as "market stability regulator" reminds me of the old Roman title of dictator. We shall see whether or not Bernanke is Caesar or Cincinnatus.

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