The Fed, IMF and Disregarded Warnings

  • Jerome L. Stein


The Fed, the IMF and Treasury lacked adequate tools, which might have indicated that asset values were vastly out of line with fundamentals. The Fed and the Fund were not searching for such tools because they did not believe that they could or should look for misaligned asset values or excess debt, The Fed was blind-sided by the Efficient Market Hypothesis (EMH), that current prices reveal all publicly available information. One cannot second- guess the market. There cannot be an ex-ante misalignment. Bubbles exist only in retrospect. The Jackson Hole Consensus gave them great comfort in adopting a hands off position by claiming that “As long as money and credit remain broadly controlled, the scope for financing unsustainable runs in asset prices should also remain limited….numerous empirical studies have shown that almost all asset price bubbles have been accompanied, if not preceded by strong growth of credit and or money”. Since the period preceding the crisis was the Great Moderation, there was no need to worry.


Central Bank Housing Price Asset Price Credit Default Swap Capital Requirement 
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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  • Jerome L. Stein
    • 1
  1. 1.Division of Applied MathematicsBrown UniversityProvidenceUSA

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