Eric S. Rosengren, president of the Federal Reserve Bank of Boston, today gave a speech on asset bubbles and systemic risk. It’s more or less in line with Bernanke’s line: monetary policy wasn’t the main culprit in inflating the housing bubble and so the problem requires a regulatory fix.
Mr Rosengren calls for forward-looking, systemic risk supervision, which he says is a “serious gap” in financial regulation.
The systemic supervision that is needed would focus on possible future losses and is inherently forward-looking. Doing this well requires an understanding not only of institutions but also markets, and it requires taking into account the full range of outcomes, both expected and potential – including those that have a low likelihood of occurring but that could have serious adverse consequences. While we may not be able to eliminate all bubbles, we should be able to limit the degree to which the financial sector feeds and propagates these booms, and the sector’s vulnerability to subsequent busts.
Mr Rosengren doesn’t spell out exactly what tools the regulators would have at their disposal if they identified a risk of an asset bubble. But, where a bubble exists, Read more