...As Fed Chairman Ben Bernanke faces a confirmation hearing Thursday on a second four-year term, he and others at the central bank are rethinking the hands-off approach they’ve followed over the past decade.
Fed officials used to think there was little they could or should do to prevent bubbles from inflating... The Fed’s main strategy... was to mop up after a bubble burst with lower interest rates to cushion the blow to the economy and restart growth.
Now, Fed officials admit the stance didn’t work. They’re groping for alternatives. Of the two methods to prevent bubbles — using regulations to protect the financial system from excess and changing monetary policy by raising interest rates — Mr. Bernanke falls on the side of greater regulation, an idea he has advocated in the past.
“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset price bubble bursts in the future,” Mr. Bernanke said.
Fed Debates New Role: Bubble Fighter, Jon Hilsenrath, Wall Street Journal, December 2, 2009
Cynics would say that Bernanke is simply singing the tune he needs to in order to get confirmed by the Senate. And perhaps they are right.
But I can tell you that when we first met with people at the Fed last year, Mike Masters and I were told that the Federal Reserve believed strongly in free markets, that speculation could not have inflated oil prices because there was no inventory growth, etc. Basically we got the standard line.
However, on our last visit to the Fed, a few months ago, we got a much warmer reception. In fact our host told us that from his personal perspective (not the official line mind you) that he would not be opposed to seeing position limits imposed on the oil derivatives markets. That is a very signficant change that can only come with some substantial soul searching.