The following post comes to us from Erik F. Gerding
of the University of Colorado Law School.
Five years after the failure of Lehman Brothers, asset price bubbles remain in forefront of the public imagination. Commentators see potential bubbles from Bitcoin to Chinese real estate. Three articles in this week’s edition of the Economist examine whether bubble are afflicting various economies and markets. This year’s Nobel prizes in economics brought to the forefront questions of market efficiency and whether bubbles exist.
My new book, Law, Bubbles, and Financial Regulation, looks at the often overlooked legal dimensions of bubbles. The book examines how market frenzies and regulatory interact in powerful and often destructive ways. (You can read the first chapter of the book, published by Routledge in November, here). Feedback between market and legal dynamics leads to a pernicious outcome: financial regulation can fail when it is needed the most. The dynamics of asset price bubbles weaken financial regulation just as financial markets begin to overheat and the risk of crisis spikes. At the same time, the failure of financial regulations adds further fuel to a bubble.
The book examines the interaction of bubbles and financial regulation through the history of over three centuries of financial frenzies and crises. This perspective reveals that law is crucial to the story of bubbles and that the legal history of the current global crisis has many forerunners. Bubbles involve more than irrational exuberance or low interest rates. Financial law and legal change play critical roles in the severity and consequences of bubbles. The book explores the ways in which bubbles lead to the failure of financial regulation by outlining five dynamics, which it collectively labels the “Regulatory Instability Hypothesis” (with apologies to Hyman Minsky). These five dynamics include:
…continue reading: Law, Bubbles, and Financial Regulation