Federal Reserve Chairman Ben Bernanke, like his predecessor Alan Greenspan, doesn't plan to get in the way of surging home or stock prices.
Bernanke, staking out a key policy in his first month on the job, said yesterday at Princeton University that the central bank "doesn't really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another." Bernanke's views on dealing with rising asset prices match those of Greenspan, who was faulted by some economists for allowing a stock-price bubble to inflate in the late 1990s and for letting US home prices soar in recent years. Timothy Geithner, vice chairman of the Fed panel that sets the benchmark US rate, said last month the role of asset prices in Fed policy may expand.
"It's generally a bad idea for the Fed to be the arbiter of asset prices," said Bernanke, 52, who became chairman on Feb. 1, succeeding Greenspan, who was in the post for 18-and-a-half years. "The Fed doesn't really have any better information than other people in the market about what the correct value of asset prices is."
Bernanke, a former economics professor at the New Jersey school, said in response to a question after a speech on inflation that the Fed does need to "pay close attention" to changes in the prices of assets because they can affect spending and economic growth, important factors in the Fed's assessment of the economy.
"To use interest rates to try to puncture the housing bubble would be a disastrously bad idea, and Bernanke obviously agrees, because he's not going to come close to doing that," said Alan Blinder, a former Fed vice chairman who is now a Princeton economics professor. He wrote a paper last year saying Greenspan may have been the "greatest central banker" ever.
Blinder said the Greenspan-Bernanke approach to bubbles is "basically, you do nothing, and then the corollary to that is that you mop up after they burst to keep the financial system from taking a big fall."
Bernanke's hands-off approach has "been his position for years, since he was an academic," Blinder said.
US home prices have risen 55 percent in the past five years, according to the Office of Federal Housing Enterprise Oversight. Sales of previously owned US homes fell in December to the lowest level since March 2004, evidence the five-year housing boom may be coming to an end.
Geithner, who is president of the New York Federal Reserve bank, said last month the rise and fall of asset prices such as stocks, bonds and homes will probably play a bigger role in setting US interest-rate policy in the future. Bernanke in the past has said using interest rates to attack asset prices may damage the broader economy.
"A much better approach for the Fed in dealing with problems of financial markets is from the microeconomic point of view," Bernanke said yesterday.
"For example, we pay a lot of attention to the supervising of banks to make sure that they are taking sound policy, making sound loans," he added.
In his speech, Bernanke's first outside Washington since taking over the Fed this month, the new chairman stressed the benefits of stable prices in achieving high employment and moderate interest rates.
"Low and stable inflation and inflation expectations enhance both economic growth and economic stability," Bernanke said at a symposium for the 75th anniversary of Princeton's Woodrow Wilson School of Public and International Affairs. The compatibility of those goals, now the consensus view among economists and central bankers, was reached over "many years" of experience, leadership and analysis, he said.