Friday, November 27, 2009

Leaning against the bubble

This speech by Chicago Fed president Charles Evans was thought provoking:

... I prefer to see policy reacting to apparent exuberance in asset markets and the problematic risk exposure this could create, rather than initiating action out of a strong conviction that these particular assets are overvalued. ... One advantage of using financial stability as our metric is that it does not require a central bank to take a stand on whether the assets in question are overvalued. Rather, the responses would be implemented whenever there are concerns that asset prices may experience a sharp decline in the future, regardless of whether this decline is driven by fundamentals or by the bursting of an asset bubble. [emphasis mine]

Why am I troubled by the phrase emphasized?

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