The trouble with financial bubbles

It is said central banks should not try to head off a bubble, just clean up the mess. Now the cost is so high, and the cleanup so long, maybe we should change tactics

Very soon after the magnitude of the 2008 financial crisis became clear, a lively debate began about whether central banks and regulators could - and should - have done more to head it off. The traditional view, notably shared by the former US Federal Reserve chairman, Alan Greenspan, is that any attempt to prick financial bubbles in advance is doomed to failure. The most central banks can do is clean up the mess.

Bubble pricking may indeed choke off growth unnecessarily - and at high social cost. But there is a counter-argument. Economists at the Bank for International Settlements (BIS) have maintained that the costs of the crisis were so large, and the cleanup so long, that we should surely now look for ways to act pre-emptively when we again see a dangerous buildup of liquidity and credit.

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