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Bernanke: It's hard to predict and deflate bubbles in real time

Fed Chairman Ben Bernanke just wrapped up the morning session of his Senate confirmation hearing for a second term.

Sen. Chuck Schumer (D-N.Y.) asked Bernanke what he can do to prevent future bubbles, like the housing bubble that led us into this recession.

"It is extraordinarily difficult in real time to know if an asset price is appropriate or not," Bernanke said.

He said some countries have "special measures" used to address specific bubble formation. For instance, when housing prices start to balloon, some countries require higher down payments for home purchases.

But forecasting and deflating general bubbles is very difficult, Bernanke said, and is best addressed with smart and tough regulation (and transparency, I add), and Bernanke said he would "not rule out using monetary policy" to help deflate bubbles.

That's music to the ears of fiscal conservatives, who believe loose money -- very low interest rates, like we have now (ahem) -- fueled the housing bubble.

What Schumer is talking about is something economists call "macro-prudential regulation," and it requires an activist, centralized government -- anathema to fiscal conservatives, by the way -- to step in and govern markets.

I wrote a big piece on macro-prudential regulation last year when George Soros floated it, which you can read by clicking here.

-- Frank Ahrens
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By Frank Ahrens  |  December 3, 2009; 12:13 PM ET
Categories:  The Ticker  | Tags: Ben Bernanke, Charles Schumer, regulation  
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