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The Federal Reserve goes a bit more rogue

The Economist flags a Federal Reserve working paper that embraces some decidedly non-neoclassical theories of how bubbles form:

There’s lots of interesting stuff in the paper, in particular on the lack of correlation between policy rates and housing prices in other countries. But most useful is the authors’ reconstruction of the forces that produced the bubble. They cite a self-reinforcing feedback loop of rising home prices, declining lending standards, financial innovation and buyer euphoria. They explicitly endorse the models of Robert Shiller, a leading proponent of the role of psychology in bubbles, Charles Kindleberger, author of the classic "Manias, Panics and Crashes," and Hyman Minsky.[...]

The Fed's economists have traditionally personified the technical, evidence-based, progressive school of economics which holds that individuals are mostly rational, innovation is mostly good, and given sufficient examination and enlightened action, recessions can be avoided. This is one reason the Fed has traditionally been reluctant to assign a lot of importance to greed, fear and bubbles. This paper’s embrace of Mssrs Minsky, Shiller and Kindleberger may bely a subtle shift to a less utopian, more fatalistic view.

Full paper here.

By Ezra Klein  |  January 8, 2010; 11:33 AM ET
Categories:  Federal Reserve  
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Comments

This was interesting in in the sense of seeing a bear catch a fish. A fun sighting if you catch the very moment.

"Rouge" is a titallating adjective, but it's more of catching-up imo.

While the sober headline might be: "Fed considers the last 50 years of economics for missing pieces" it's hard to find the fun adjective/verb for such a weighty moment. Dark humor: "Fed looks in the mirror and it doesn't break"

Posted by: HalHorvath | January 8, 2010 1:26 PM | Report abuse

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