Why the Federal Reserve will Not Stop Bubbles

Professor Jim Hamilton has an interesting post up about whether the Federal Reserve should try to put a stop to bubbles:

Before we can discuss this issue, we'd need to agree on what we mean by a "bubble". Here's one definition that a lot of people may have in mind: a bubble describes a condition where the price of a particular asset is higher than it should be based on fundamentals and will eventually come crashing back down.

If that's what you believe, then there's a potential profit opportunity from selling the asset short whenever you're sure there's a bubble. And if that's the case, my question for you would be, why don't you do put your money where your mouth is instead of telling the Fed to do it for you? Your answer might be that it could take years for the bubble to pop, and you're not willing to absorb the risk in the interim. Or maybe you don't have the capital to cover the necessary margin requirements while you're shorting the bubble on the way up.

Even so, posing the statement in this way should bring a dash of humility to those currently claiming to see a plethora of bubbles that the Fed supposedly needs to fight. What exactly persuades them that they are right and all the other players in the market are wrong? How much of their personal wealth are they staking on the strength of their convictions? And even if you're absolutely sure you know how to identify bubbles, raising interest rates as a response is, as Tim Duy observes, "a rather blunt weapon that kills indiscriminately".