Watching for bubbles like a hawk

By Ben Walsh
April 3, 2014

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Fed governor Jeremy Stein, the central bank’s resident bubble cop, is resigning effective May 28. He will return to Harvard’s economics department, which he left in 2012.

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:

Analogies
HFT “isn’t traders vs the little guy, it’s Alien vs Predator” – Charlie Gasparino

UGH
We don’t really know what policies help the long-term unemployed – Annie Lowrey

Epistles
Bill Gross writes an ode to his dead cat, Bob – Jenn Ablan
Earlier: “Bill Gross feels fat and he wants to talk about it” – Bess Levin

Yep
Hire an ex- slacker: they’ve learned things achievement-bots can’t – Megan McArdle

Primary Sources
ECB keeps rates unchanged – ECB
Earlier: Euro area inflation falls to just 0.5%  - Eurostat

Study Says
One consequence of the fiscal cliff: people moved income from 2013 into 2012 – Chicago Fed

Oxpeckers
Gawker is against internet speak, in favor of using “Brobdingnagian” in headlines – Poytner

Crime and/or Punishment
The US has opened a criminal investigation into Citi’s Mexican fraud – DealBook

FWIW
1100 words from Schwab on the evils of HFT – Charles Schwab

USA! USA!
Americans only take 1/2 of their paid vacation – Marketwatch

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