Central bankers didn't cause housing boom - IMF

WASHINGTON, Sept 22 - Central bankers did not cause the recent housing booms in the United States and elsewhere, although they should have acted more forcefully once the bubbles were apparent, the IMF said on Tuesday.

In a study on asset price bubbles prepared for its upcoming World Economic Outlook, the International Monetary Fund said policy-makers have focused too narrowly on containing inflation and ought to put more emphasis on financial stability.

"Monetary policy was not the smoking gun," said Alasdair Scott, a senior economist at the IMF. "There were warning signs to policy-makers that could have been followed."

The research addresses one of the biggest complaints about the U.S. Federal Reserve and its fellow central banks -- that they kept interest rates too low for too long earlier this decade, which helped inflate housing bubbles in the United States and parts of Europe.

The IMF concluded that central banks were "strikingly successful in keeping inflation in check," but that was not enough to prevent asset price booms and busts.

It cautioned against policy-makers reacting automatically to changes in asset prices or trying to determine appropriate levels. Instead, "they should examine what is driving asset price movements and be prepared to act in response."

The findings appear consistent with Fed Chairman Ben Bernanke's idea of "macroprudential supervision," which involves looking across the full spectrum of the financial sector for evidence of dangerous buildups in risk rather than just looking at banks individually.

Bernanke and his predecessor, Alan Greenspan, have long argued that asset bubbles are hard to identify as they are inflating, which makes it difficult for central banks to pop them safely.

They also contend that the Fed's main policy tool -- adjusting interest rates -- is too blunt an instrument to be used against bubbles. Bernanke has argued that regulation is a much more effective mechanism.

However, some of his fellow Fed policy-makers have said that the high costs now evident from the collapse of the housing market may make leaning against asset bubbles worth considering in the future.

The IMF acknowledged concerns about monetary policy being a blunt instrument, cautioning that in the process of trying to reduce the risk of a dangerous bust, central banks may "raise costly false alarms."

It said one possibility would be to expand central bank mandates to include concern for "financial vulnerabilities."

"Macroprudential tools could be used to help tackle problems in financial markets, which may help limit the need for aggressive monetary policy reactions," the IMF said.

Regulatory reforms proposed by President Barack Obama's administration call for that sort of structure. It would install the Fed as a systemic risk regulator that would be charged with telling financial firms to reduce large concentrations in risky assets.