It was to smother financial panics that Congress created the Federal Reserve in 1913. During Alan Greenspan's tenure as chairman, the Fed jumped in to keep the 1987 stock-market crash, the 1998 Long-Term Capital Management scare and the 2000-01 tech-stock collapse from spiraling into something worse. But that very successful firefighting fostered the risk-ignoring attitudes that brought on a conflagration. There are some like 2008 presidential candidate Ron Paul who argue that the lesson here is that we'd be better off without the Fed. A more palatable interpretation is that if the Fed is going to step in to prevent panics, it needs to do more to deflate the bubbles that inevitably precede those panics. Fed policy over the past quarter-century has been asymmetrical: it bailed institutions out of trouble but did ever less to restrain them during fulsome times. That has to change.
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