The relatively meager economic growth of the past few years owes to a variety of causes, with declining population growth, moribund productivity gains, and a credit market that has yet to recover fully from the financial crisis being the most probable culprits. However, the notion that insufficiently expansionary monetary policies hindered what should have been robust post-recession growth has broad currency across the zeitgeist: advancing this idea is almost the raison d’etre of Paul Krugman. This perception is undoubtedly a reason that the Fed hesitates to end its current zero-interest-rate regime, as if another round of quantitative easing and another year or two with an interest rate of zero could return the economy to full employment.

While printing money may be easier to accomplish than expansionary fiscal policy, economists have long argued that expansive monetary policy isn’t costless, and none more eloquently than Elmus Wicker, professor emeritus of economics at Indiana University. He has spent a remarkably fecund lifetime looking at the mistakes of monetary authorities, filling up several books in doing so. The stock market bubbles that arose in the 20th century—both before the Great Depression as well as the Internet bubble of the 1990s, among others—can be laid at the feet of monetary policy.

Wicker’s latest book doesn’t come to bury the Fed, but to praise it, or at least praise certain federal open market committees throughout the 20th century. He has tasked himself with determining whether the Federal Reserve has shown the ability to burst speculative bubbles before they wreak havoc with financial markets and the broader economy.

The cost to our economy from these bubbles, once they’ve exploded, can be immense: Wicker has pointed out in previous works that there is every reason to believe that the actions of the Federal Reserve not only contributed to the speculative stock market bubble in the late 1920s, but also exacerbated the length and depth of the Great Depression through a series of disastrous decisions. The Fed knew in the 1930s that keeping money tight would hasten bank collapses, but the view held by many at the time—especially in the Chicago Federal Reserve Bank—was that financial markets needed an occasional fire to clear the brush and lay the groundwork for renewed growth, an inapt metaphor taken entirely too far.

Ubiquitous asset bubbles / The major question regarding the art of deflating asset market bubbles is whether the Fed can even recognize those bubbles ex ante and, if so, whether it has the ability to gently prick such a bubble without hastening any market collapse and ancillary real decline. Wicker argues that it has done precisely such a thing in the past, repeatedly and successfully. And on occasions when it has abjured such responsibilities, tears have resulted.

He posits that there have been 11 clear asset bubbles easily identifiable ex post since the Fed’s inception: three before the Depression (including in 1928–1929) and eight afterward. The Fed successfully popped bubbles in 1919 and 1926, but in 1929 its behavior was inconsistent. Wicker shows that while it may have increased the discount rate in the late summer of 1929, the move was merely a seasonal adjustment that in no way constituted a monetary tightening. He argues that the Fed was unambiguously expansive until the collapse.

In the years after World War II, with the stock market crash still fresh in everyone’s memory, the Fed regularly took action in various ways to rein in speculative bubbles and did so without any great damage to the broader economy. There were three such occasions in the 1950s and a couple in every one of the next five decades as well. This was not a task that occurred with extreme regularity, and the Fed had proven itself adept at reacting to them, according to Wicker. It has used a variety of tools at its disposal to effectively puncture them, most notably margin requirements.

It wasn’t until Alan Greenspan became Fed chair that the Fed abandoned this task—to great harm, ultimately. Wicker takes apart Greenspan’s famous utterance that identifying a bubble is beyond the ken of the monetary authority, and that for the Fed to deliberately inject itself into a market to do so means supplanting the collective decisionmaking of millions of market participants with the judgment of one man—or one bureaucracy. That perspective was shared to some degree by Greenspan’s predecessor, Paul Volcker.

This attitude famously led to the so-called “Greenspan put,” which is the notion that potentially disastrous market collapses would always be countered by accommodative Fed policies, thereby creating a moral hazard and encouraging risky wagers in financial markets. It’s not at all clear that some variant of a “put” isn’t still in place today.

While anyone who is paying attention can agree that market bubbles can wreak havoc, whether the Fed can recognize them and subsequently deflate them with a minimum of grief is a question that sharply divides the discipline. Wicker has marshaled a wealth of evidence that the Greenspan doctrine is simply wrong: the Fed proved itself capable of discerning lacunae between market and fundamental asset values and deflating bubbles, with a record of success that spans decades as well as a variety of regimes and chairs. Abdicating a job it had done commendably for over 60 years because the evidence suggests it cannot be done is an interesting decision, and one that was not widely challenged at the time—to our everlasting regret, Wicker suggests.

A useful lesson? / Wicker is a remarkably lucky economist. I say that because as arguably the world’s foremost living monetary historian, who cut his teeth studying the causes of the Great Depression under John Hicks, he may be the only one of his ilk who was able to experience both the Great Depression and the financial crisis of 2008 and lived to write about them both.

His research brings forth a positive message: the Fed has indeed proven itself able to recognize asset price bubbles and it has shown itself capable of deflating them with little or no ancillary damage. Abjuring such a responsibility—as it has done for the last three decades—is a prescription for disaster.

Stock market bubbles can impose severe economic costs. Wicker reminds us that the stock market boom in the late 1990s directed billions of dollars of capital to Silicon Valley and the information technology sector that could have been used much more productively elsewhere. And the housing bubble engendered by the loose monetary policy in the early 2000s sent billions into misbegotten housing investments, lit the fuse for the financial crisis that caused trillions of dollars of wealth to evaporate, and triggered a steep recession.

These days it sometimes seems that the Fed has few defenders. Wicker has had a few bones to pick with the institution over the years, but he has identified a skill that it ably exercised for decades, but that many now deny ever existed. While conservatives today go to pains to do what they can to circumscribe its efforts—and not without good reason—we should also recognize what it can do. Finding and ending speculative bubbles before their effects cross over to the real economy would be an incredibly valuable contribution to society. Assigning itself such a task would impose a genuine constraint on an otherwise natural tendency for the Fed to accommodate financial markets as long as there are no overt signs of price inflation.

In other words, listening to Wicker’s findings would be akin to asking the Fed to consider a broader price index than just the Consumer Price Index or Personal Consumption Expenditure Index. It would also entail more than merely watching a single number and require it to monitor price trends across markets—a task that it is surely capable of performing.

Failing to do so could be enormously costly.