Fed Risks Fueling More Bubbles, Davos Economists Say (Update1)
By John Fraher and Simon Kennedy
Jan. 23 (Bloomberg) -- The Federal Reserve, which yesterday announced its first emergency rate cut since 2001, is ignoring history's lessons and risks re-igniting more asset bubbles, economists at the World Economic Forum annual meeting said.
The Fed is saying ``we are there to clean up after bubbles first rather than to prevent the danger,'' Stephen Roach, Morgan Stanley's Asia chairman, said in a panel discussion in Davos, Switzerland. ``It's a dangerous, reckless and irresponsible way to run the world's largest economy.''
The Fed cut its benchmark rate by 75 basis points yesterday after stock markets tumbled from Hong Kong to London amid signs of a U.S. recession. The central bank has drawn fire for paying too much attention to economic growth and not enough to asset prices, fueling unsustainable booms in stocks, property and derivatives.
Former Fed Chairman Alan Greenspan was criticized for failing to curb the Internet stock boom of the 1990s and for then fueling further bubbles by cutting rates too much to limit the fallout when equities crashed.
``It's good for a central bank to ease when the risks are of a crash in the global economy, but that means you have to have a more systematic approach to asset bubbles,'' said Nouriel Roubini, founder of New York-based Roubini Global Economics LLC. ``If we have a `Greenspan put' or a `Bernanke put,' then we will create over and over again a distortion of excessive debt and leverage.''
Counter Argument
The Fed's cut came a day after the MSCI World Index fell 3 percent, the steepest decline since 2002.
Greenspan and Bernanke counter that it's too difficult for central banks to spot bubbles before they emerge and raising rates to curb higher housing or stock prices would risk derailing the rest of the economy. Explaining its decision, the Fed yesterday said ``broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.''
To contact the reporters on this story: John Fraher in Davos, Switzerland at jfraher@bloomberg.net ; Simon Kennedy in Davos, Switzerland at Skennedy4@bloomberg.net .
Last Updated: January 23, 2008 06:37 EST |
