Greenspan looks back on asset prices during the late 1990s and the Fed’s response to the bubble. The conclusion seems to be that the Fed has little real ability to recognize and respond to asset bubbles.
FRB: Speech, Greenspan — Economic volatility — August 30, 2002
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If low-cost, incremental policy tightening appears incapable of deflating bubbles, do other options exist that can at least effectively limit the size of bubbles without doing substantial damage in the process? To date, we have not been able to identify such policies, though perhaps we or others may do so in the future.
It is by no means evident to us that we currently have–or will be able to find–a measure of equity premiums or related indicators that convincingly presage an emerging bubble. Short of such a measure, I find it difficult to conceive of an adequate degree of central bank certainty to justify the scale of preemptive tightening that would likely be necessary to neutralize a bubble.
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