Dean Baker of the Center for Economic and Policy Research’s blog “Beat the Press” has some thoughts on what the Federal Reserve could have done to help ease the economic collapse that occurred after the housing market fell apart.

One of the most simple and obvious ways that central banks can combat a bubble: talk. During the run-up of the housing bubble, Federal Reserve Board Chairman Alan Greenspan repeatedly said that everything was fine in the housing market, as did Ben Bernanke, who was a governor at the Fed for most of the period. This helped undermine the case of those who were warning of the bubble.

By contrast, if Greenspan had explicitly warned of the bubble and documented its existance and potential dangers with extensive research from the Fed staff, it may have been effective in containing its growth. The financial industry cannot simply ignore research from the Fed and there was no serious response to the evidence that the Fed could have presented.

There is no reason the Fed and other central banks cannot use the full capabilities of their research staff to attempt to counter dangerous financial bubbles. There is a virtually costless strategy with enormous potential payoffs.

I’m not an economist, but it sounds like a decent idea.

The above article is reprinted from the Risk Management Monitor - the official blog of Risk Management magazine.