LATELY more and more people have been questioning the received wisdom about what a central bank should do when confronted by an asset price bubble. That piece of wisdom, shared by Alan Greenspan and Ben S. Bernanke, the former and present Federal Reserve chairmen, holds that deliberate bubble-bursting is something between impossible and dangerous  and thus best avoided. Instead, according to this view, the Fed should let bubbles burst of their own accord, and then be prepared to mop up after.

This strategy has modest objectives. It is not intended to prevent bubbles, or even to limit the price collapse when a bubble bursts. Rather, it is designed to limit collateral damage to the rest of the financial system, and especially to the overall economy. The Fed executed such a mop-up-after strategy with great success when the tech bubble popped spectacularly in 2000. Despite the destruction of roughly $8 trillion in paper wealth, not one financial institution of any size failed, and the ensuing recession was so mild that I call it “the recessionette.”

Those who now attack the Greenspan-Bernanke position make three main points:

First, the strategy of letting bubbles die of natural causes, then mopping up, seems not to have worked so well this time around. When the subprime bubble burst last year, the financial system was thrown into turmoil  where it remains. The Fed has fought an incipient economic downturn ever since, financial institutions are teetering and failing, and Bear Stearns  well, you know about Bear Stearns.

Second, critics contend that the mopping-up-after strategy sows the seeds of yet more bubbles. It is argued, for example, that the Fed’s superlow interest rates after the stock market bubble burst led us directly to the housing bubble. The Fed now stands accused of being a serial bubble blower.