Can the Fed in fact pop bubbles?

Megan McArdle wonders:

Prospectively, if you want to do it effectively, you probably need to intervene in the very early stages.  The Fed raised interest rates in the late 1920s, to no effect–indeed, it encouraged foreign capital to flow in.  Iceland’s central bank, too, tried to quiet its financial bubble, but borrowers simply ignored them–borrowed at the higher rate, or stupidly took on currency risk by getting auto loans and mortgages from abroad.  Meanwhile, more lenders were attracted by the higher rates.  If you think house prices will go up 10% every year, a 1% increase in mortgage interest rates is not really that worrying.

Do you know any good pieces on this topic?  Daniel Gross also says it is hard to do.  Here is one article on Bernanke’s bubble laboratory.


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