By raising interest rates to prick the bubble of inflation, the Fed induces a mild recession that is particularly hard on smaller companies.

FORBES: This Time, Inflation Will Be Good For Stocks

With housing showing unmistakable signs of cooling in recent weeks, it seems Fed Chief Ben Bernanke is right to think that the rise in interest rates to 5.25% has been sufficient to prick the bubble (his predecessor, Alan Greenspan, went to 6.5% in 2000 to prick the dot-com bubble).

FORBES: Fed Takes A Breath

The Federal Reserve's Alan Greenspan has declared himself fully vindicated in his decision not to prick the stockmarket bubble in the late 1990s, but instead to wait for it to burst and then cut rates sharply to cushion the economic consequences.

ECONOMIST: Yesterday's financial architecture needs refurbishing

While the previous Fed chairman, Alan Greenspan, took rates to 6.5% to pierce the dot-com bubble of the 1990s, Bernanke seems to be betting that about 5.5% will be sufficient to prick the housing bubble.

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In January Mr Greenspan declared himself fully vindicated in his decision not to prick the stockmarket bubble in the late 1990s, but instead to wait for it to burst and then cut rates sharply to cushion the consequences.

ECONOMIST: The American economy

Indeed, it is possible to find entirely respectable economists (Robert Shiller for example) arguing that it was the lack of options and futures markets in housing that failed to prick the US housing bubble before it blew.

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The bubble will eventually burst anyway, but it would have been better to prick it sooner at the cost of a mild recession than to risk a deeper recession later.

ECONOMIST: Dollar danger

BIS, and Philip Lowe, at the Reserve Bank of Australia, have tried to shift the emphasis of this debate away from the question of whether central banks should prick a bubble.

ECONOMIST: Yesterday's financial architecture needs refurbishing

But if the bubble has now burst, interest rates no longer need to rise to prick it.

ECONOMIST: On the edge | The