The Federal Reserve may have to rethink the Greenspan doctrine that a central bank should not try to target asset prices in the aftermath of the housing bust, Gary Stern, president of the Minneapolis Fed, suggested yesterday.

While he had not yet changed his opinion on the subject, Mr Stern said: "I am reviewing this conclusion in the wake of the fallout from the decline in house prices and from the earlier collapse of prices in technology stocks."

He said the housing bust and the tech bust had shown that it was "neither easy nor costless to deal with the aftermath of unsustainably high asset prices".

His comments question one of the dominant doctrines at the Fed, and one that is closely associated with Alan Greenspan, its former chairman. They follow similar remarks by Paul Tucker, a member of the monetary policy committee of the Bank of England.

Mr Greenspan argued that it was very difficult to discern whether an increase in asset prices was justified by economic fundamentals or the result of speculative activity.

He also argued that even if it was possible to identify an asset price bubble, it was very difficult to puncture a bubble without taking such heavy-handed action that the economy as a whole suffered serious damage.

Moreover, Mr Greenspan argued that smaller efforts to slow asset price increases - such as modest pre-emptive interest rate cuts - typically backfired, as they failed to halt price gains, and simply persuaded more investors that the enhanced prices were well founded.

The Greenspan conclusion - embraced by the Fed as an institution - was that a central bank would do more harm than good trying to burst bubbles, and should instead concentrate on containing the damage after bubbles burst.

Mr Stern acknowledged that these arguments could still hold. But he said: "I suspect that there may well be practical, albeit far from infallible, ways to identify excesses in asset prices."

Moreover, he added: "It is well within the realm of possibility for policymakers to build support for and at least obtain tolerance of policies designed to address excesses."

The Minneapolis Fed chairman said any actions to reduce or limit asset price increases would "have implications for economy-wide growth and employment". But "so of course do asset price collapses".

Mr Stern also called for policymakers to take pre-emptive action in good times to reduce the expectation that the government would rescue systemically important financial institutions.

He said the authorities should simulate the failure of institutions, and see whether the spillover effects would be too great to tolerate.

The information gathered "would help set the agenda for reforms that agencies could pursue to limit the type of events that would end up justifying government support".

Samuel Brittan, Page 9