Preventing Bubbles : What Role for Financial Regulation?

In the wake of the U.S. housing bubble and collapse and the consequent financial collapse of 2007-2009 and its severe consequences for the U.S. economy, it is unsurprising that there have been calls for policy makers to prevent future asset price bubbles – through the better exercise of monetary policy and/or financial regulatory policy. This essay focuses on financial regulation and argues that such efforts would, at best, be ineffective and, at worst, could squelch productive and efficient asset pricing. Instead, policy makers should focus on better regulatory efforts – better prudential regulation – to ameliorate the consequences of asset bubble deflations on the financial sector