No Shortage of Bubbles and Troubles

The stock and bond markets rallied after the Federal Reserve held short-term interest rates steady at its Sept. 20 meeting. Investors believe that the Fed has successfully steered the economy between too hot and too cold, and that we're headed for a just-right soft landing with inflation under control and the economy growing at a solid pace. The so-called "Goldilocks economy" will push both stock and bond prices higher.

But I think it's premature to slap the Fed on the back and say "mission accomplished." The truth is the Federal Reserve still hasn't pricked the financial bubble that it created with nearly a decade of easy-money policies.

Oh, the housing market bubble may be deflating, with or without the abrupt pop that ended the stock market bubble of 2000. But the Fed hasn't succeeded in sopping up the flood of cheap money it created when it drove short-term interest rates down to 1% in June 2003 and kept them at that level until June 2004. Now all of that cheap money is pushing up borrowing in the commercial real estate market fast enough to worry bank and savings and loan regulators. And that isn't the only sector in the midst of a bubble.

Washing Away a Curse

It might be better to name this the "Lady Macbeth economy." Cast Fed Chairman Ben Bernanke as Shakespeare's bloody queen who cried, "Out, out damn spot," as she vainly tried to wash the blood of a murdered king from her hands. In this economic version of the tragedy, however, Bernanke wanders the darkened halls of the Fed muttering, "Out, out damn bubble," as he tries to wash away the financial curse left to him by his predecessor, Alan Greenspan.