The Fed and the Bubble

THE FED AND THE BUBBLE….Dean Baker thinks that the housing market is in big trouble. Brad DeLong disagrees:

I guess the big difference is that I don’t think that home prices are likely to plunge. Why not? Because Ben Bernanke is more aware than any other possible Fed Chair that large-scale housing asset price deflation threatens to have the same bad consequences as large-scale commodity price deflation, and I don’t see a future in which he allows housing prices to fall without first taking major steps to prevent it.

OK, but what can Ben Bernanke do about this? There are things the Fed and the Treasury can do to cushion the blow for homeowners and investors who lose money or face foreclosure, but what policy instruments do they have to deal with the downward price spiral itself? Maybe I’m missing something obvious, but if buyers stop wanting to buy houses then prices are going to plunge. What can the Fed do to prop up demand or reduce supply? What did they do in 1991? Anything?

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