Regulating Bubbles Away

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"Regulating Bubbles Away"

I’m all for the idea, recently touted by Ben Bernanke, that there should have been tighter underwriting standards during the housing bubble. But I wonder what it is people think would have happened had their not been a speculative boom in house prices? Would tighter underwriting standards really have eliminated the human penchant for herd thinking, speculative excess, and irrational exuberance? I doubt it. The indebted US consumer, and the fiscally irresponsible Bush administration, the global savings glue, etc. would all still have been around. And one way or another the emergence of some kind of speculative bubble at some point was pretty much inevitable.

The striking thing about the current recession, at the end of the day, isn’t that there was an asset bubble and then it popped. Things like that happen now and again. The striking thing is that the policy response to the decline in housing prices was so poor that we wound up mired with 10 percent unemployment.

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