By Alister Bull
Christina Romer, former chair of the White House Council of Economic Advisers and a strong advocate for Janet Yellen to take over from Ben Bernanke as the next chair of the Federal Reserve, slammed the Fed in a lecture last week that accused the U.S. central bank of being too meek and of fighting the wrong battle by being fixated on asset bubbles.
Romer, sometimes touted as a potential candidate to fill one of the 3 vacancies on the Fed’s Board in Washington, or maybe run a regional branch (Cleveland has an opening), also discussed deliberately aiming for 3 or 4 percent inflation, as well as targeting nominal GDP.
One key observation from her remarks was central banks must tackle financial instability head-on. The Greenspan-era disdain for using monetary policy to burst asset bubbles has become a luxury which the post-crisis world can no longer afford:
“As hard as it is to spot a bubble in real time, monetary policy makers need to try, and to take steps to slow it down. This doesn’t mean they should fixate on bubbles and fear them lurking around every corner. But we now know that thinking we can just ignore them is a very bad strategy.”
Romer delivered the lecture at Johns Hopkins University event in Washington on Oct. 25. It was called: “monetary policy in the post-crisis world: lessons learned and strategies for the future“.