Nov. 19 (Bloomberg) -- Federal Reserve Vice Chairman Donald Kohn said he was too confident the U.S. economy could rebound from a burst house-price bubble, which has proven more damaging than the commercial real estate collapse in the early 1990s.

``The economic disruption here and abroad are likely to be considerably more severe than in past episodes,'' Kohn said today in prepared remarks for the Cato Institute's Annual Monetary Conference in Washington. ``Mopping up after this asset-price bubble has turned out to be much harder because of its greater magnitude.''

Central bankers worldwide are reconsidering how to limit asset-price bubbles after excessive speculation in U.S. housing triggered a credit crunch and jolted financial markets, pushing much of the global economy toward a recession. The economies of the U.S., Japan, U.K., and euro region will probably shrink simultaneously next year, the International Monetary Fund said this month.

``I and other observers underestimated the potential for house prices to decline substantially,'' Kohn said. ``These costs have turned out to be much greater than I and many other observers imagined.''

Kohn has been a long-time skeptic of using changes in the federal funds rate to deflate asset bubbles, and has endorsed the view of former Fed Chairman Alan Greenspan that central banks should instead ``mitigate the fallout'' after bubbles burst. He restated his defense of the Fed's position today.

Asset bubbles are difficult to detect and may not be easily pricked without causing damage to the economy, the Fed vice chairman said.

`Tighter Monetary Policy'

``I am not convinced that the events of the past few years and the current crisis demonstrate that central banks should switch to trying to check speculative activity through tighter monetary policy,'' Kohn said. ``The case for extra action still remains questionable.''

In contrast, Fed Chairman Ben S. Bernanke suggested last month the Fed may end its decades-old aversion to interfering with excessive speculation. Officials should review how supervision and interest rates can tackle the ``dangerous phenomenon'' of bubbles in housing, stocks and other assets that risk bringing the entire economy down, Bernanke said on Oct. 15.

``There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it,'' he told the Economic Club of New York in response to a question after a speech.

Buffer Economy

The scope of the credit crisis, and the difficulty of the Fed in buffering the economy from harm, may have discredited Greenspan's viewpoint, economists said.

The rationale for a hands-off approach to asset-price bubbles ``has pretty much been popped,'' Ethan Harris, co-head of U.S. economic research at Barclay's Capital Inc., New York, said before the speech. ``The response of the Fed is that you put zero weight on trying to prevent asset bubbles. Usually the answer isn't to do nothing. It is to do something limited.''

Fed officials say that supervisory and regulatory tools are better suited to reining in speculative excess. Congressional leaders have faulted the Fed for failing to supervise the risk management and lending practices of financial institutions.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;

Last Updated: November 19, 2008 09:01 EST