Fed President Charles Plosser Says Fed Is Helpless To Reverse Sharp Decline in House Prices

Monday, January 17, 2011
By Paul Martin

by Tyler Durden

Philly Fed’s Plosser once again releases a slam dunk speech which is the most vocal critique of Ben Bernanke’s interpretation of the freedoms afforded to him by monetary policy to date. “How do you use monetary policy to burst a bubble in Las Vegas real estate, where house prices were appreciating at a 45 percent annual rate by the end of 2004, without damaging the Detroit market, where prices were increasing at less than a 3 percent annual rate? Because monetary policy is such a blunt instrument, asking monetary policy to do what it cannot do, such as seeking to deliberately influence the evolution of asset prices, risks creating more instability, not less. Moreover, the moral hazard created by the belief that the central bank would intervene if prices of a certain class of assets became “misaligned” might, in fact, cause more inefficient pricing and more instability, not less…monetary policy cannot reverse the sharp decline in house prices when the economy has significantly over-invested in housing” And more:

” Plosser’s conclusion is spot on, and means that Congress should immediately enact a limit on the Chairman’s recently self-appointed 3rd mandate, which is to not only reflate the biggest asset bubble in history, but to get the Russell 2000 to 20,000: ” I too am concerned that we are in the process of assigning to monetary policy goals that it cannot hope to achieve. Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less. Nor should monetary policy be asked to perform credit allocation in support of particular sectors or firms. Expecting too much of monetary policy will undermine its ability to achieve the one thing that it is well-designed to do: ensuring long-term price stability.”

The Rest…HERE

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