Preventing Bubbles: What Role for Financial Regulation?
18 Pages Posted: 16 Apr 2013
Date Written: November 15, 2011
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: Suggested Citation