Bernanke: more regulation to control bubbles
Now, Federal Reserve chairman Ben Bernanke has flagged that the Obama administration will introduce more regulation to control bubbles. The bottom line: more government intervention to protect markets.
In a speech to the American Economic Association, Bernanke says more regulation is the big lesson to draw from the meltdown.
"Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again,'' Bernanke said."Having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs."
Still, he did not rule out higher interest rates although he conceded monetary policy is a blunt tool.
For that matter, so is regulation. We need other methods to inhibit bubbles. We can start with improved disclosures and enhanced financial data bases, so investors have a better idea of the risks ahead.
In his book, The Subprime Solution, Yale University professor of economics Robert Shiller says we need market based mechanisms to stop bubbles. These would include new markets in government securities, real estate and occupational income. He says it's more a case of risk management than risk avoidance. If you don't take risks, nothing grows. The challenge is doing it from a position where you don't damage yourself in the process.
