Bernanke on bubbles: Nothing ‘obvious’ at the moment

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Federal Reserve Chairman Ben S. Bernanke reiterated Monday that the central bank now knows enough to be worried about asset bubbles.

He just doesn’t see any in the U.S. at the moment despite some investors’ concerns about stock market valuations and the still-ravenous global appetite for Treasury securities.

In a Q&A session after a speech in New York, Bernanke at first channeled his predecessor, Alan Greenspan, on the subject of bubbles: Bernanke said it was ‘inherently, extraordinarily difficult to know whether an asset’s price is in line with its fundamental value or not.’

And he added: ‘It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.’


The Greenspan Doctrine was that it was too difficult for the Fed to know if a particular market was in a bubble (say, like housing in the mid-2000s) and that it was better for the central bank to leave markets to their own devices. We all know how that turned out.

Bernanke has made clear that the Greenspan Doctrine doesn’t rule the Bernanke Fed. Given the disaster wrought by the housing bubble, the Fed chief on Monday said that the central bank recognized the need to address the question of bubbles ‘in a serious way.’

He said policymakers were ‘looking at various models of valuation for stocks, bonds and other kinds of assets’ to judge their levels relative to the fundamentals.

As to whether the Fed would use higher interest rates specifically to prick a presumed bubble, Bernanke said that decision would have to be made in the context of the Fed’s two principal policy mandates -- promoting full employment and price stability.

If addressing ‘major misalignments of the financial markets’ would further those policy goals, ‘We’d have to think about it very seriously,’ he said.

-- Tom Petruno