The stock market isn’t as leveraged as the housing market, and so the impact of a bubble there wouldn’t be as great to the broader economy, a Federal Reserve official said Wednesday.
Minneapolis Fed President Neel Kashkari delivered a speech on monetary policy and asset-price inflation, or bubbles. The former Goldman Sachs Group executive argued that bubbles are both hard to spot with confidence, and that central-bank officials in any case should act very cautiously.
“Given the challenges of identifying bubbles with any confidence and the costs of making a policy mistake, I believe the odds of circumstances ever making sense to use monetary policy to try to slow asset prices down are very low. I won’t say never—but a whole lot of evidence would have to line up just right for it to be the prudent course of action,” he said.
He gave three examples of well-intentioned government officials trying to spot bubbles: former Fed Chairman Alan Greenspan’s 1996 “irrational exuberance” speech; his own work at the behest of then-Treasury Sec. Henry Paulson trying to look for a crisis; and the collapse in oil prices
after climbing above $100 a barrel.
Kashkari said the Fed’s tools to slow down asset prices are limited. “For example, if we see a bubble forming in commercial real estate, raising interest rates won’t affect just the commercial real-estate market, but also housing, automobiles, consumer borrowing and capital-intensive industries, among others. We may want consumers to keep spending, but condo prices to stop rising. Raising interest rates would slow them both down,” he said.
The Fed does have tools like its supervision authority over banks, which in 2013 the central bank used to rein in leveraged loans. But Kashkari said, unlike other countries, the Fed cannot adjust the loan-to-value requirements of mortgages. And the foreign authorities that do have such tools—from Sweden lifting the loan-to-value limit, to Vancouver imposing a 15% tax on foreign home purchases—didn’t always get their desired results, he said.
In any case, not every asset bubble has consequences as severe as the 2008 housing bubble.
“When the stock market corrects, investors lose money. Technology companies with no profits go bankrupt. But the economy as a whole does not seem as vulnerable as when a large, highly leveraged asset class such as housing corrects. The Fed’s job is not to protect investors. It is to promote financial stability. Sometimes those overlap. Not always,” he said.