“Central banks seek to promote financial stability while avoiding the creation of moral hazard.  People should bear the consequences of their decisions about lending, borrowing, and managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill advised.  At the same time, however, in my view, when the decisions do go poorly, innocent bystanders should not have to bear the cost.  In general, I think those dual objectives—promoting financial stability and avoiding the creation of moral hazard—are best reconciled by central banks’ focusing on the macroeconomic objectives of price stability and maximum employment.  Asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift.  Such a strategy would not forestall the correction of asset prices that are out of line with fundamentals or prevent investors from sustaining significant losses.  Losses were evident early in this decade in the case of many high-tech stocks, and they are in store for houses purchased at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely.  To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment.  But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson. ”