"One of the problems has been a failure of integration of these theories...."
Could a distinction be made between a tipping point and a cause? Today just as during the '20s & '30s certain areas have gotten extended which make them vulnerable to dramatic corrections. It then only takes a small pebble which could be almost completely random to start an avalanche.
If there were a dramatic correction today, for instance, could we really say what was the real cause versus a tipping point since a large multitiude of vulnerable, highly interdependent areas that are mutually reinforcing are involved? If it wasn't one tipping point item, would not another have eventually taken its place as things get extended? A great heart surgeon might be able to perform miracles for a while, but eventually we have to lose weight, stop smoking and exercise if we hope to not have a recurrence of a heart attack.
We need to lower the risks factors so we turn the Fed Chairman meetings into a boring position like having a regular physical. Increasingly becoming dependent on a heart surgeon or Fed Chairman's world class expertise almost becomes a moral hazard in itself. Better, it would seem, to not be as interventionist, allow more market discipline to take place at earlier stages before the whole system is put at risk. Eventually there will be a Fed Chairman no matter how smart who will not make the right call.
A person by way of analogy who does not take care of their health will eventually reach a stage where any procedure will have such side effects as to be counterproductive, thus tying the surgeon's hands. Today, if the Fed raises rates to have enough ammunition for the inevitable next crisis they endanger bringing down the asset markets and consumer demand at the same time. No matter what they do, whether they act or not, there is increasing danger.
The moral hazard of trying to protect people who need to be protecting themselves is just setting up a bigger fall. Corporations I think are anticipating this fall and are now holding almost unprecedented amounts of cash. The Fed Chairman's role is viewed with an increasing mystic almost like that of the ancient oracles at Delphi, the reading of entrails by a priesthood in ancient Egypt and old Soviet Kremlin watchers to predict the future with similar ambiguity.
Working to devolve these decisions and risks back into the hands of the citizens lessens the systemic risks. Bernanke needs to say he can buy us at best some time, but we have to do the heavy lifting ourselves, and that over time he is going to lessen the moral hazard that guaranteeing our protection brings being cognizant that the law of unintended consequences has not been repealed.
Trying to do away with forest fires only increased their destructiveness. Controlled burns allow a necessary natural regeneration as we've now learned. Not providing federal flood insurance would cause some to be damaged, but providing it has encouraged far more than would do otherwise to build in areas prone to destruction. The Fed faces the temptation of becoming an insurance agent rather than focusing on ensuring the value of the currency. In the former role it would seem only a matter of time before they fail imho although there might be an attempt to control more and more of the economy to forestall this outcome for awhile.
As citizens working with each other in association on issues we have in common we have to be able to assess dangers of hurricanes, fires in our neighborhoods, perils of overeating, buying overvalued stocks, the economic impact of wars, speculating in land and housing, etc. as we've always known if we are to retain our liberty and prosperity. Giving this job to big government only results in our eventual enfeeblement. People use to save money to provide a margin of safety. Today we now have an almost zero savings rate nationally. If people only drive more recklessly upon being given a seatbelt, they just endanger themselves and others more. Return market discipline, keep the currency sound and leave the rest to us and our elected representatives to make the adjustments.
(That is my hypothesis, being a non-economist.)
This is Friedman's argument and it's essentially right. Where the disagreement comes in is which measurement tool you use to effect an automatic rate hike or rate cut. Is it CPI? GNP growth? It is not as simple as it sounds, which is one reason the Fed looks (supposedly) at a myriad of factors to determine if the economy is heating up or cooling down.