As sub-prime lending problems at Bear Sterns, the venerable Wall Street investment bank, now come to light, one has to be struck by the positive spin that market analysts continue to put on the looming problems in the US sub-prime mortgage market. More disturbing still is the seemingly sanguine attitude and policy passivity of the Federal Reserve in the face of the mortgage market’s present unraveling.
For despite the Feds’s recent sad experience in 2001with the bursting of the equity price bubble, the Federal Reserve now remains more concerned with inflation moving out of its 1-2 percent comfort zone than with the real possibility of a sub-prime induced financial market meltdown. If it indeed turns out that the Fed was yet again late to begin easing monetary policy in the wake of the bursting of another asset price bubble, history will hardly judge the Fed kindly.
I have no idea whether we should be more worried about inflation or deflation. But we’ve had an unusually long run of prosperity, which probably means that we’re overdue for a decline.