Regulators need ways to stem asset bubbles -Bank of England deputy

By Reuters Staff
August 25, 2009

Britain's Chancellor of the Exchequer Alistair Darling (R) and Deputy Governor of Bank of England Charles Bean attend a G7 finance ministers and central bank governors meeting in Rome February 14, 2009. LONDON, Aug 25 (Reuters) – The financial crisis has tipped the arguments in favour of central banks acting to stem asset-price bubbles but they will need new instruments to help them do this, Bank of England Deputy Governor Charles Bean said on Tuesday.

In a speech in Barcelona examining the causes of the recent crisis, Bean made little reference to the current outlook for BoE monetary policy beyond saying that the response to the BoE’s quantitative easing programme was “mildly encouraging” so far.

Bean said the blame for the financial market turmoil that plunged the world into recession had to be shared by a variety of culprits ranging from the economics profession to investors’ poor understanding of the risk they were taking on.

Addressing the lessons for monetary policy in the future, Bean noted there had been much academic debate earlier this decade about how central banks respond to rapid credit growth and rising asset prices.

“The events of the past couple of years have clearly tipped the balance in favour of taking pre-emptive action. And in second-best world, where monetary policy is the only instrument available to cool a credit/asset boom, then that may well make sense,” he said, according to the text of his remarks.

But he noted that monetary policy is a “blunt weapon” for this purpose and “one really needs another instrument that has a stronger and more direct impact on credit growth and asset price inflation than monetary policy. That is what so-called macro-prudential regulation is supposed to achieve.”

He said most discussion on this had so far focused on pro-cyclical capital requirements or its close relative dynamic provisioning — where banks built up more capital in the good times to prepare them for the bad.

But he said there could also be instruments directed at excessive shifts into risky lending.

He also noted that while the present analytical toolkit was probably sufficient, economists should pay more attention to history given that financial boom and busts appear to be a characteristic of economies.

Credit also needs to be included in macroeconomic models, he said, but was less certain that bringing psychology and behavioural economics would improve things that much.

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