Randomly Noted

It was a banner day for market economists: Federal Reserve types were popping up and speaking everywhere.

We had past and present. Former Federal Reserve Chairman Alan Greenspan talked to the bipartisan panel trying to figure out the causes of the credit crisis. The ex-chief understandably defended his tenure and said high levels of reserves at financial institutions paved the way forward.

The current top central banker, Ben Bernanke, gave a stern warning about the need for a long-term plan to lower federal deficits, lest declining faith in the U.S. among investors push interest rates higher somewhere down the road.

And the honorable dissenter, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, made his reasonable but lonely pitch that the Fed’s zero short-term rate policy had served its emergency purposes and it was now time to slowly return to merely accommodative policy to support a recovery in its nascent stages.

With all that to think about, the line that stuck most with me came from none of those worthies, but from another, the president of the Federal Reserve Bank of New York and permanent voting member of the Federal Open Market Committee, William C. Dudley.

Dudley said the following about the central bank’s need to combat asset price bubbles as they inflate: “uncertainty is not grounds for inaction.”

Let that be the rallying cry for a new policy day at the Federal Reserve that shunts aside the previous orthodoxy that the central bank had no greater powers than others to discern a bubble on the rise and if it did its interest rate stick would club the real economy along with whatever wayward prices were on the rise.

Discerning a bubble in any asset price area is “going to be very challenging,” said Dudley in classic central banker understatement. But given the devestation left in the wake of the housing-subprime bubble, avoiding the challenge is the worst choice.

In a strong and detailed argument that informs the text of a speech by Dudley to the Economic Club of New York, potential remedies are on display.

They are “macroprudential,” said Dudley, things like limiting leverage or other restraints on financial institutions and market participants when prices in any arena become significantly unmoored from fundamentals.

First, there’s the not-used-often-enough “bully pulpit” that belongs to a well-respected central bank. “Announcement effects” can be powerful, said Dudley, “especially when they can be followed by changes in policy.”

Amen to that.