Bernanke, Ben
I still believe the following, which is that monetary policy is a very blunt instrument. If you are raising interest rates to pop an asset bubble, even if you were sure you can do that, you might, at the same time, be throwing the economy into recession, which kind of defeats the purpose of monetary policy.
And therefore, I think the first line of defense—I mean, I think, we have a sort of a tripartite line of defense. We start off with very extensive and sophisticated monitoring at a much higher level and much more comprehensively than we’ve had in the past. Then we have supervision and regulation, where we work with other agencies to try to cover all the empty or uncovered areas in the financial system. And then, in addition, we try to use communication and similar tools to affect the way that financial markets respond to monetary policy. So we do have some first lines of defense, which I think should be used first.
That being said, you know, I think that given the problems that we’ve had—not just in the United States, but globally in the last 15, 20 years—that we need to at least take into account these issues as we make monetary policy. And I think most of the people on the FOMC would agree with that. What that means exactly depends on the circumstances. I think if the economy is in very weak condition and interest rates are very low for that purpose, it’s very difficult to contemplate raising rates a lot because you’re concerned about some sector in the financial sphere. On the other hand, if you’re in an expansion and there’s a credit boom going on, that—the case in that situation for making policy a little bit tighter might be better.
So, as I’ve said many times, I have an open mind in this question. We’re learning; all central bankers are learning. But I think I still would agree with the point I made in my very first speech in 2002, as a Governor at the Federal Reserve, where I argued that the first line of defense ought to be the more targeted tools that we have, including regulatory tools and, to some extent, macroprudential tools like some emerging markets use.