Ben Bernanke, the Chairman of the U.S. Federal Reserve Board, is making a remarkably long-drawn-out retreat in the face of the prevailing hindsight judgments about the causes of the U.S. housing bubble, which, when it burst, did much to set off the global financial crisis in 2008.
In his speech in Atlanta on Sunday, to the American Economic Association, Mr. Bernanke held to his view that regulatory authorities - one might unkindly interpret this to mean regulators other than the Federal Reserve itself - should have been the ones to deal with the bubble, rather than the central bank with its power to influence interest rates.
This may seem somewhat self-serving, but Mr. Bernanke is at least slowly edging away from his 2002 opinion that monetary policy is "not a useful tool" for restraining asset-price booms and busts; now, Mr. Bernanke professes some openness to using monetary policy as "a supplementary tool" that might help deal with "dangerous buildups of financial risk" in the future.
Although his predecessor, Alan Greenspan, made the phrase "irrational exuberance" famous, Mr. Greenspan stoutly resisted any second-guessing of the asset prices that surely were begotten by just such exuberance. Moreover, he did not believe that U.S. housing prices could actually fall, until that happened. Mr. Bernanke, who was one of the governors of the Federal Reserve in that period, essentially remains loyal to the Greenspan inheritance, and his Atlanta speech was a defence of the stimulative U.S. monetary policy of the 21st century's first decade.
Back in 1993, John Taylor of Stanford University crafted a formula for setting the central bank's overnight interest rate, which is well known among economists. The "Taylor rule" is based on the inflation rate, the central bank's inflation target and the output gap. By that measure, Mr. Bernanke acknowledged, the Federal Reserve's policy was too loose in the early 2000s, but he argued that the rule - as he said, it is only a rule of thumb - should be revised to reflect projected figures, rather than current data, because monetary policy only takes effect with a time lag.
Considering Mr. Bernanke's own emphasis in his speech on the importance of information available at the time that action is taken, the case for this revision of the Taylor formula in favour of predictions, as opposed to actual measurements, is not a compelling one.
Nonetheless, Mr. Bernanke's gradually increasing flexibility about the uses of monetary policy is a welcome and promising change.