Reply #6: Another article from the same site regarding Issing and Greenspan [View All]

[54anickel]

You'll need to scroll about 2/3 of the way down to find this section.

http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=30533

Issing v. Greenspan

The unfolding discord between the ECB and the Greenspan Fed took an interesting and decidedly public turn this week, as the Wall Street Journal published an astute piece by ECB Chief Economist (and my personal favorite contemporary central banker) Dr. Otmar Issing. The following are excerpts:

“There seem to be strong arguments that central banks should not target asset prices, and only assess their development in the context of their potential influence on goods prices… Even in the case of extreme high valuations of assets, a situation in which most observers would agree that the prevailing level of asset prices is not sustainable… there are strong arguments that a central bank should not try to ‘prick the bubble.’ The interest rate increase required to prick the bubble in times of collective exuberance would inflict heavy losses on the real economy. The negative consequences for the reputation of the central bank following such policy would be more than obvious.

All this is the consensus view.

But can central banks just leave it at that and reject any responsibility? I grant that it is a tough challenge to identify an overshooting of asset prices at an early stage. And to repeat, no central bank should pretend knowledge it cannot dispose of. Nevertheless, we have repeatedly experienced situations in which market participants found it more rewarding to follow a trend than to bet against it despite their own view that the development was not sustainable. It is worth noting that with hindsight, i.e. after the collapse, almost everybody seems to agree that a ‘bubble’ has burst. Is it not difficult, then, to accept the argument that it should be totally impossible to make any judgement ex ante? Should it not be the role of central banks to communicate concerns in an appropriate form and thereby to try to contribute to a more sober assessment of asset price developments?

Huge swings in asset valuations can imply significant misallocations of resources in the economy and furthermore create problems for monetary policy. Not every strong decline in asset prices causes deflation, but all major deflations in the world were related to a sudden, continuing and substantial fall in values of assets. The consequences for banks, companies and households can be tremendous...

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It is surely not by happenstance that Dr. Issing’s article was titled Money and Credit, and I simply could not be more appreciative....

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