rules to match american tightening ] to raise their rates. tighter credit then contributed to the beginning of a recession that was picked up in the mixed economic indicators of early august and september. these dispelled hopes that earnings would continue to grow at a rapid rate. as the economy faltered, wiser investors began leaving the market. when selling picked up speed, margin calls and delayed information from the ticker ensured a dramatic panic. ” white goes on to call the fed ’ s policies during this period “ inappropriate. ” he wrote, “ instead of allowing the stock market bubble to run its course, the federal reserve ’ s tighter monetary policy pushed the economy further into recession, rendering it more vulnerable to the shock that came when the bubble finally burst. ” new york fed governor harrison and other participants argued after the fact that the problem with their policy was not that they tried to burst the stock - market bubble but that their efforts were too little and too late. this attempt to defend the fed ’ s policies of the latter 1920s does not hold up. there is little credible evidence of a bubble in the u. s. stock market before march 1928 ( galbraith, 1954 ; white, 1990 ) ; yet, in part because of the workings of the gold standard, u. s. monetary policy had already turned exceptionally tight by late 1927 ( hamilton, 1987 ). tighter policy earlier would have brought the depression on all the more quickly and sharply ( see eichengreen, 1992, p. 214, for further discussion ). the federal reserve went on to make a number of serious additional mistakes that deepened and extended the great depression of the 1930s. besides trying to pop the stock market bubble, the fed made little or no effort to protect the banking system from depositor runs and panics. most seriously, it permitted a severe deflation in the price level, which drove real interest rates sky - high and greatly increased the pressure on debtors. a small compensation for the enormous tragedy of the great depression is that we learned some valuable lessons about central banking. it would be a shame if those lessons were to be forgotten. conclusion understandably, as a society, we would like to find ways to mitigate the potential instabilities associated with asset - price booms and busts. monetary policy is not a useful tool for achieving this objective, however. even putting aside the great difficulty of identifying bubbles in asset prices, monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral

to assessing the critics ’ argument, and to get my own views on the table right away, let me briefly sketch a policy framework that i believe is useful for thinking about these issues. before i do so, i will state the usual proviso, that the opinions expressed here are mine alone and not necessarily those of my colleagues at the federal reserve. in particular, i emphasize that my comments today should not be interpreted in any way as representing an official policy position of the board of governors or the federal open market committee. my suggested framework for fed policy regarding asset - market instability can be summarized by the adage, use the right tool for the job. as you know, the fed has two broad sets of responsibilities. first, the fed has a mandate from the congress to promote a healthy economy - specifically, maximum sustainable employment, stable prices, and moderate long - term interest rates. second, since its founding the fed has been entrusted with the responsibility of helping to ensure the stability of the financial system. the fed likewise has two broad sets of policy tools : it makes monetary policy, which today we think of primarily in terms of the setting of the overnight interest rate, the federal funds rate. and, second, the fed has a range of powers with respect to financial institutions, including rule - making powers, supervisory oversight, and a lender - of - last resort function made operational by the fed ’ s ability to lend through its discount window. by using the right tool for the job, i mean that, as a general rule, the fed will do best by focusing its monetary policy instruments on achieving its macro goals - price stability and maximum sustainable employment - while using its regulatory, supervisory, and lender - of - last resort powers to help ensure financial stability. let me discuss the two parts of this recommendation in a bit more detail. the first part of the prescription implies that the fed should use monetary policy to target the economy, not the asset markets. as i will argue today, i think for the fed to be an “ arbiter of security speculation or values ” is neither desirable nor feasible. of course, to do its job the fed must monitor financial markets intensively and continuously. the financial markets are vital components of the economic machinery. moreover, asset prices contain an enormous amount of useful and timely information about developments in the broader economy, information that should certainly be taken into account in the setting of monetary policy. for example, to the extent that a stock - market boom