Asset bubbles are unique and difficult to identify, and while studying how central banks should respond, perhaps the best ways to attack them may be "bully pulpit and macro-prudential tools, such as rules limiting loan-to-value ratios or leverage," Federal Reserve Bank of New York president and chief executive officer William C. Dudley said yesterday.
Poor regulation of the financial system aids in the formation of such bubbles, which "typically occur after an innovation has occurred that creates uncertainty about fundamental valuations," Dudley told the Economic Club of New York, according to a prepared text released by the Fed.
Since bubbles may be "difficult to discern" and have "unique characteristics," Dudley said, "a rules-based approach to bubbles is likely to be ineffective and that tackling bubbles to diminish their potential to destabilize the financial system requires judgment."
Uncertainty should not be an excuse for inaction, he added.
