Mr Mishkin, a former Fed governor, draws a contrast between credit-boom bubbles and irrational exuberance in stockmarkets, such as the dotcom bubble.

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Becca Mishkin, a resident of the Upper West Side in Manhattan, doesn't have a regular landline phone, so she relied on her cell phone to keep in touch with family.

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"Small losses in one sector of the credit market can have an outsized impact on aggregate economic activity, " said Federal Reserve Board Governor Frederic Mishkin at a conference in New York Friday.

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Better, said Mr Mishkin, to act fast once a bubble bursts.

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But, said Mr Mishkin, Japan's policymakers made a lot of mistakes: the imbalances in its banking industry were not sorted out, so they got worse.

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In other words, Mr Mishkin suggests the Fed should cut interest rates before a deflating housing bubble affects the real economy, even though it resisted acting before an inflating bubble created dangerous economic distortions.

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