Stephen S. Roach (Chairman, Morgan Stanley Asia) on what fed the bubble that is now bursting:

Basking in the warm glow of a successful battle against inflation, central banks decided that easy money was the world's just reward. That set in motion a chain of events that has allowed one bubble to beget another--from equities to housing to credit.

... As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.

That doesn't mean central banks should target asset markets. It does mean, however, that they need to break their one-dimensional fixation on CPI-based inflation and also give careful consideration to the extremes of asset values.

Wise words. Read the whole thing.

I make a similar argument for a target index broader than the CPI here, noting an earlier op-ed piece by Roach.

Hat tip: Bob Murphy