Morning Must-Read: Barry Eichengreen: Monetary Policy Should Not Be the First Line of Defense Against Bubbles

Barry Eichengreen: Monetary Policy Should Not Be the First Line of Defense Against Bubbles: “There is a clear victor in the “lean versus clean” debate…

…Central banks cannot concentrate only on cleaning up after crises; the costs of financial instability are too high. Rather, as recent events have amply shown, the monetary authority must lean against excesses as they develop…. [In the 1920s] George Harrison of the Federal Reserve Bank of New York… worried about the impact on the broader economy and preferred to use other instruments to address financial imbalances. Harrison’s alternative was “direct pressure”… using the Fed’s regulatory powers and moral suasion to persuade member banks to curtail their lending…. Central banks should focus on developing more effective macro-prudential instruments…. They should adjust monetary policy to address potential financial risks as a last resort, not as their first line of defense.