Fed Gov. Raskin Warns of Potential for More Asset Bubbles

WASHINGTON — Asset bubbles are not spontaneous occurrences, but part of the landscape and could happen again, Federal Reserve Gov. Sarah Bloom Raskin warned Wednesday, noting that using monetary policy to prevent bubbles, though possible, represents a failure of regulation.

But in the fragmented U.S. regulatory system, it is critical to focus on coordination and cooperation among the many agencies, and to stress compliance with regulations, not just increased capital, Raskin said in a speech prepared for delivery to the Exchequer Club in Washington.

Citing the housing bubble that led to the recent global crisis, she said, "Perhaps our recent asset bubble was the result of a perfect storm, one that will not recur for decades. But it is my view that asset bubbles are a feature of our financial landscape; that what happened before could happen again; and that the growth and after-effects of asset bubbles reflect particular financial institution decisions and particular regulatory policy choices or lapses. In my view, their emergence is usually neither intentional nor accidental."

Regulatory policies "can lean against emerging asset bubbles and the vulnerabilities that attend them by restraining financial institutions from excessively extending credit," Raskin said.

And although monetary policy "also has the power to lean against the growth of asset bubbles," she cautioned that "in my opinion such use would represent a failure of regulatory policy."

Supervision and prevention represents a challenge because the U.S. regulatory system is "fragmented," and "such a fragmented structure itself demands unusual and extensive degrees of coordination and cooperation among financial regulators so as to maximize the potential for comprehensive and harmonized regulation. Without such coordination and cooperation, there will be regulatory gaps and overlaps."

Examiners must review compliance to spot risks — real risks, not just new business practices — and "the public needs to have faith that regulation is meaningful," she said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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