Preventing Bubbles: What Role for Financial Regulation?

18 Pages Posted: 16 Apr 2013

See all articles by Lawrence J. White

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2011

Abstract

This article focuses on financial regulation and argues that the use of financial regulation to try to prevent bubbles is a mistake — a fool’s errand. Bubbles are easy to identify after the fact but much harder (or impossible) to identify beforehand. In the absence of (the near impossible) success in correctly identifying bubbles beforehand, efforts to address bubbles beforehand run the severe risk of squelching efficient and productive price changes — the false positives — as well as squelching the speculative and ultimately wasteful price changes of a bubble. However, what financial regulation specifically, prudential regulation—can do is to ameliorate the consequences of a bursting bubble for the financial sector.

Keywords: stock market bubble, dot com bubble, housing bubble, housing crisis, government regulation, monetary policy, Federal Reserve

JEL Classification: G01, R28, E52, E58

Suggested Citation

White, Lawrence J., Preventing Bubbles: What Role for Financial Regulation? (November 15, 2011). Cato Journal, Vol. 31, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=2251352

Lawrence J. White (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
49
Abstract Views
380
PlumX Metrics