This is the Cato Daily Podcast for Thursday, October 22nd, 2009.

I'm Caleb Brown.

What must you believe if you think the Federal Reserve should have seen the housing bubble coming, should have raised rates earlier,

and could have averted the meltdown of the past two years.

Cato Institute Senior Fellow Peter Van Doerrin is co-author of the new Cato Paper,

would a stricter Fed policy and financial regulation have averted the financial crisis.

He comments.

What was the conventional narrative of how the Fed got us into this housing mess.

Many political economists and political commentators have argued that we now know, right, a standard part of the narrative of our

current crisis is that we all know and I Van Doorn's rule is whenever someone says we

all know I start looking at the data to make sure it's true. But most people

say we all know that the Fed goofed. The Fed left interest rates too low for too

long and thus if it had raised rates earlier we would have avoided the housing bubble

and the current financial crisis.

And my colleague Jagadish Kolkley and I have written a paper that's just been released by Cato that asks the question,

what would have to have been true for this narrative to be true that the Fed caused the problem

and thus better Fed policy would have prevented the problem.

The first is a technical issue which is do economists have a technical apparatus and capability that allows them to detect

Asset bubbles or any other kinds of anomalies in financial markets in real time

Which they then could say to decision makers decision maker you have a problem our early warning detection system

somewhat like you know radar for intercontinental ballistic

missiles that we detect a problem in financial markets and you chairman of the

...