by Calculated Risk on 5/15/2008 07:42:00 PM

From Fed Governor Frederic S. Mishkin: How Should We Respond to Asset Price Bubbles?

Rex Nutting at MarketWatch has the story: Fed should deflate some bubbles, Mishkin says

The Federal Reserve should try to aggressively deflate some types of asset bubbles before they can harm the economy, Fed Gov. Frederic Mishkin said Thursday.

But raising interest rates isn't the way to prick a bubble, he said. And some types of bubbles, such as the dot-com bubble of the late 1990s, probably shouldn't be pricked at all, he said.

On the other hand, the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation to prevent widespread economic damage, Mishkin said.

The Fed should watch for bubbles that are associated with a fast expansion of credit, he said, because these bubbles have the potential to inflate bank balance sheets on the way up and destroy them on the way down.

I'll have more later ...