Assets Bubbles Are The Great Unknown

The Federal Reserve doesn’t really understand asset bubbles.

Unfortunately, neither does anyone else.

From Catherine Rampell's New York Times article, "The Fed Doesn’t Really Understand Asset Bubbles." Her complete article is available here.

Rampell's article is based on Federal Reserve Vice Chairman Donald Kohn's speech, "Monetary Policy Research and the Financial Crisis: Strengths and Shortcomings". He gave the speech at the Federal Reserve Conference on Key Developments in Monetary Policy, Washington, DC on October 9, 2009.

Our limited knowledge of the determinants of asset prices and their effects on credit has made it more challenging to respond to the crisis and explain our actions to the public. We have had to relax our standard assumptions that financial assets are highly substitutable, and that their rates of return can be readily arbitraged.

Or as Captain Kirk said, "To boldly go where no man has gone before."

Kohn's complete speech is available here.