Resident Fellow Desmond Lachman

Samuel Brittan is right on the mark in suggesting that a central bank's remit should be to minimise economic booms and busts ("Central banks need not divine bubbles", July 28). He also correctly suggests that central bank policies should be modified to take into account asset price movements as well as forecasts of consumer prices. However, with US house prices already having increased by more than 40 per cent in real terms over the past few years, and with every indication that the US house price bubble is now beginning to deflate, one wonders whether Sir Samuel is not suggesting that the barn door be bolted after the horse has fled.

Perhaps it might have been more timely for Sir Samuel to remind central bankers of the costly mistake that the US Fed made by delaying interest rate cuts after the stock market bubble burst in early 2000. By only beginning to cut interest rates after September 11 2001, the Fed eventually had to reduce interest rates by a cumulative 550 basis points to 1 percent by 2004. In so doing, it sowed the seeds for the present housing price bubble, the unwinding of which will now constitute a serious policy challenge for the Fed.

Desmond Lachman is a resident fellow at AEI.