Geithner Against Popping Bubbles

I headed over to the Economic Club of New York luncheon today to listen to N.Y. Fed Governor Tim Geithner talk about his vision for regulatory reform following the '07-'08 credit crunch.

vision departs a bit from Treasury Secretary Henry Paulson's in that Geithner says explicitly investment banks need to be more tightly regulated:

The most fundamental reform that is necessary is for all institutions that play a central role in money and funding markets--including the major globally active banks and investment banks--to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity.

And despite recent reports that the Fed was examining whether it was feasible to pop dangerous asset bubbles before they got too bubbly, Geithner joined some of his colleagues in coming out against the idea:

I know that many hope and believe that we could design our system so that supervisors would have the ability to act preemptively to diffuse pockets of risk and leverage. I do not believe that is a desirable or realistic ambition for policy. It would fail, and the attempt would entail a level of regulation and uncertainty about the rules of the game that would offset any possible benefit.

After Geithner's speech, Harvard economist and departing NBER president Martin Feldstein, as well as Henry Kaufman, were given the opportunity to throw questions at the NY Fed president. By far the more provocative questions came from Feldstein:

- Seemingly bemused that as Fed Chairman, Ben Bernanke had broken with tradition and commented on the value of the dollar, Feldstein jokingly asked if it was possible to have a strong dollar at home and a weak dollar abroad in order to reduce the current account deficit. Of course, one way to encourage a stronger dollar is to increase interest rates. (Geithner side-stepped this one.)

- Next Feldstein wondered why the real value of the fed funds rate was negative (fed funds rate (2.0) minus core-CPI (2.3) = -0.3) even though inflation expectations are on the rise, implying that the Fed wasn't doing its job in keeping inflation under wraps. Geithner argued that although rates were going to have to increase globally at some point, there was as yet no indication that a surge in inflation was down the road.

As we all remember, Feldstein was rumored to be one of the top candidates to replace Alan Greenspan. It's hard not to think that had he been given the Fed reins, interest rates would be higher today.

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