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Milton Friedman said, "a central bank can control its exchange rate, it can control its interest rates, and it can control its money supply/inflation. But it can't control all three at the same time." Maybe we need to add an addendum: Too much emphasis on price stability will not allow a central bank to see asset bubbles coming at them from a mile away. China is doing a good job with inflation and its exchange rate, thanks to capital controls and its peg. But bubble-iscious it has become.

Below is a story from Reuters reporting on comments by Bank of Japan central bank governor Shirakawa. I thought they were very insightful and added some of my own commentary along the way; ending of course with another of my populist Friday rants.

NEW YORK, April 22 (Reuters) - Too much emphasis on price stability in monetary policy is one of the factors that led to the financial crises in Japan and the United States , Japan's central bank governor said in a speech on Thursday.

Masaaki Shirakawa, governor of the Bank of Japan, said while prices of basic goods and services were mostly stable in the lead-up to Japan's 1990s financial crisis, asset prices and credit extension built up a bubble that destabilized the economy. Similar conditions led to the U.S. financial crisis in 2007.

Had central bankers focused exclusively on short-term price stability during the lead-up to these crises, they would have missed the signs of growing instability, Shirakawa said.

"It has now been acknowledged that the role expected of central banks does not match one-to-one with price stability," Shirakawa said in a luncheon speech to members of the Economic Club of New York. "The experience of the bubble shows that even when prices are stable, the economy can experience huge swings."