Fed official: Regulation should be first defense against speculative bubbles; research needed

Kohn: Research needed on combating bubbles

WASHINGTON — The Federal Reserve’s outgoing vice chairman says policymakers should deepen their understanding about how to combat speculative bubbles in order to reduce the chances of another financial crisis.

Donald Kohn says the worst crisis to hit the country since the 1930s points to the need for more research on how higher interest rates can be used to limit financial speculation. That and other “homework assignments” are sure to keep economists busy for years to come, he suggests.

Given the limited research, Kohn says he favors using regulation to prevent new speculative bubbles from developing that could burst and plunge the economy into a recession. Higher rates, he says, could be used if stronger regulations don’t work.