It is painfully obvious that practitioners and policy makers alike have been less than successful in recognizing the implications of building asset price bubbles even in the advanced stages of their development. In the private sector, this failure reflects the competitive reality that there is a natural aversion against being the last institution in or the first institution out when selective sectors of the economy and financial markets are booming. In the public sector, and especially among monetary authorities, there has been something of an aversion against monetary policy initiatives designed to “target” asset price bubbles on the grounds that (1) such bubbles are difficult to recognize and (2) such policy initiatives may have a disproportionately large impact on the economy as a whole. Even worse, efforts to curtail bubbles may misjudge whether a bubble even exists, such that policy initiatives driven by false signals would have wholly unnecessary adverse consequences for the economy as a whole.
The issue of whether the private sector can do a better job of anticipating asset price bubbles is discussed in the core precepts and in the section on Risk Management. Similarly, public authorities, particularly central banks, are also reconsidering whether monetary authorities might be able – at the margin – to better anticipate asset price bubbles and respond with at least a “tilt” toward a more restrictive monetary policy. Finally, some have also raised the question as to whether the use of contra-cyclical supervisory policies (i.e., selective increases in capital charges) might be contemplated.
The Policy Group believes that active consideration of all of these areas of inquiry is desirable, but in saying so it is also mindful of the “laws of unintended consequences”. That is, this subject matter is highly complex and is one where miscalculation or misjudgment can have serious adverse consequences. Finally, and most importantly, there is no substitute for sustained discipline in both public policy and private action, which remains the best recipe to limit the severity of asset price bubbles and contain their damage when inevitably they occur.
Monday, 11 August 2008
More from the Corrigan report - this is from the Emerging Issues section (PDF).