A Unifying Approach to Preventing Asset Price Bubbles

Naked Capitalism has the article A Unifying Approach to Preventing Asset Price Bubbles.

Debt financing amplifies the effects of asset prices fluctuations across the financial system and this can produce bubbles. Regulation therefore increasingly focusses on restricting debt financing. Although there is no silver bullet for making the financial system failure-proof, this column argues that policymakers should adopt an integrated and consistent macroprudential approach across the financial system in order to help prevent businesses moving to less-regulated pastures.

In an unusual call for regulation, CEOs of major financial institutions urged action on the asset bubble fear earlier this week (World Economic Forum 2015). They ask for a concerted macroprudential approach that addresses potential asset bubbles fuelled by current low interest rates. Without such a concerted approach, finance just moves to the least regulated segments of the financial system. Peter Wierts and I fully agree with their analysis.

If “CEOs of major financial institutions” are asking for more regulation, you have to wonder if something major is about to happen that we don’t know about. Could be the Sanders/Warren effect, I suppose. Maybe these CEOs figure that regulation might be better than jail or the guillotine.

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