Watching for bubbles like a hawk
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The NYT’s Binyamin Appelbaum writes that Stein “helped to provide an intellectual rationale for the cautious evolution of the Fed’s stimulus campaign”; he has also spoken with precision on ending the problem of too-big-fail banks and argued that how crowdfunding could be directed towards community investment.
Despite below-target inflation and and high unemployment, Stein has focused on worries that quantitative easing will promote excessive risk-taking, potentially causing bubbles, and leading to another financial crisis.
In an influential and controversial speech last year, Stein said that beyond the Fed’s traditional dual mandates of stable prices and maximum employment, the central bank should also preemptively fight bubbles with monetary policy. “Waiting for decisive proof of market overheating may amount to an implicit policy of inaction”, he warned. Generally, the Fed has a pretty poor track record in spotting, let alone stopping, bubbles.
Stein’s approach drew a rebuke from Mark Thoma, who wrote that “if monetary policymakers begin getting skittish, then the unemployed will lose the one institution that seemed to actually care about their struggles”. Scott Sumner thinks Stein is ignoring a lesson of the the 1920s. Sumner would prefer that the Fed use its regulatory power to can discourage excessive risk-taking.
Ryan Avent has been a persistent critic of what he says is Stein’s focus on arguably frothy markets ahead of growth and employment. Last week Avent wrote that “if you want to know why the Federal Reserve is undershooting both its inflation target and its maximum employment mandate, cast your eye toward Jeremy Stein”. Stein’s most recent speech, Avent says, effectively takes “ownership of the Fed’s move toward tapering. Long-term unemployed Americans should address their letters accordingly”. Matt Yglesias tweeted even more bluntly: “Jeremy Stein is why you can’t get a job”. – Ben Walsh
On to today’s links: