Central Bankers off the Record

Brad Delong:

let me say that my conversations with senior Federal Reserve officials in 2004-2006 appear to have been very different than those Paul Krugman had. The points made in my conversations by Federal Reserve officials were roughly as follows:

• Of course we can't say "there's a bubble" or be reported as saying "there's a bubble." For a central banker to say "there's a bubble" is for a central banker to say "SELL! SELL!! SELL!!!" And financial markets where people have to worry that central bankers may suddenly say "SELL! SELL!! SELL!!!" are unlikely to function well. So we are off the record, right?...
• Is there a bubble? There's certainly a lot of froth, and there are certainly neighborhoods and regions where it would be surprising if there weren't a correction...
• <...>

• Remember that Greenspan was confident there was a tech bubble in 1996--and was wrong: there was no tech bubble until 1999. It was just a rational boom...
• And remember that when the tech bubble did crash, we had the tools to keep it from becoming a macroeconomic disaster... 
• And remember that the tech bubble gave us a lot of business model experimentation and a lot of cheap fiber--it was a social boom, a much better use of the money than if the rich people who bet heavily on tech in the 1990s had spent their money on their fourth houses or had given it to Harvard...
• More to the point: If there is a bubble, what do you want us to do? Raise interest rates to discourage mortgage borrowing and so boost unemployment? You don't want us to do that...
• More to the point: If there is a bubble, what do you want us to do? Use our regulatory authority to block transactions--to tell people "we don't care that you want to lend and you want to borrow at these terms, you can't"? If we try to do that, Congress destroys us as an independent agency in less than a year...

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