... Well, not today's Ben Bernanke of course - a far more honest version of the current Fed Chairman, one speaking before the New York Chapter of the National Association for Business Economics, on October 15, 2002.
I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market.
So do we Ben.
But wait, there's more - here is the Chairman warning about not only moral hazard but also real estate bubbles:
[A] possible indicator of bubbles cited by some authors is the rapid growth of credit, particularly bank credit. Some of the observed correlation may reflect simply the tendency of both credit and asset prices to rise during economic booms. However, to the extent that credit expansion is indicative of bubbles, I think that empirical linkage points to a better policy approach than attempts at bubble-popping by the central bank. During recent decades, unsustainable increases in asset prices have been associated on a number of occasions with botched financial liberalization, in both emerging-market and industrialized countries. The typical pattern is that lending institutions are given substantially expanded powers that are not matched by a commensurate increase in regulatory supervision (think of the savings and loans in the United States in the 1980s). A situation develops in which institutions can directly or indirectly take speculative positions using funds protected by the deposit insurance safety net--the classic "heads I win, tails you lose" situation. When this moral hazard is present, credit flows rapidly into inelastically supplied assets, such as real estate.
Finally, why Bernanke will never "pop" the current stock market bubble until it is too late:
Although neither I nor anyone else knows for sure, my suspicion is that bubbles can normally be arrested only by an increase in interest rates sharp enough to materially slow the whole economy. In short, we cannot practice "safe popping," at least not with the blunt tool of monetary policy. The situation is further complicated if, as is usually the case, the suspected bubble affects only a specific class of assets, such as high-tech stocks. Certainly there is no way to direct the effects of monetary policy at a single class of assets while leaving other financial markets and the broader economy untouched. One might as well try to perform brain surgery with a sledgehammer.
Maybe the good doctor can practice on a member of the FOMC? Oh wait, Ben was joking. Ha Ha.
And the supreme punchline, and irony:
Although eliminating volatility from the economy and the financial markets will never be possible, we should be able to moderate it without sacrificing the enormous strengths of our free-market system.
11 years after saying this, Ben Bernanke, who sacrificed the business cycle in order to promote the S&P500-driven "wealth effect", has achieved just that. Although, since what he has done is "impossible", maybe Ben was just being kind enough to warn everyone that what he is doing is doomed to failure?