Question

On page 375, your textbook mentions that some economists make the assertion the central bank should expand its domain to conduct policy based on asset prices and leverage cycles in addition to growth, inflation, and employment. In this scenario, the Fed could have worked to stop the housing price bubble that formed in the United States in the mid-2000s, for example. But your textbook also notes this would cause "outrage" among some people. Consider your position on the issue--do you think the Fed should adopt a role in influencing housing market prices? Should it do the same for the stock market (or individual company share prices)? Why or why not?

Answer 1

Federal Reserve has been established with the objective of regulating the banking system, price, money supply and employment to give economy a stable growth. These responsibilities are still very vast and lot of work is required to be done. In the wake of it, Federal Reserve should not be expanded to make policies to control the real estate price. In this regard, the government has already uniform commercial code and federal trade commission who can regulate the real estate industry. Here,  the US congress can work to bring new laws or amendment of the existing laws so that  real estate industry is regulated and prices are not overly inflated. So, it can resolve the problem, without getting involvement of Federal Reserve.

On a similar note, Securities and Exchange Commission, should be given more rights, authority and control to prevent speculative trading and bubbling of the stock prices. It will be a better way to regulate it.  Making forced and direct intervention  by the government, into the different sectors, will create discouragement to the industry and it will not be good for the economy.