Pricking bubbles in the wind: could central banks have done more to head off the financial crisis?

This article was presented as the Finch Lecture at the University of Melbourne on 13 August 2009. A fuller version of the arguments in this lecture and article will appear in Banking on the Future: The Fall and Rise of Central Banking by Howard Davies and David Green, Princeton University Press (to be published in May 2010, see <http://www.press.princeton.edu>). Regulators, commercial and investment banks, hedge funds and rating agencies have all borne some blame for the current global financial crisis, but could central banks have done more? It is argued in the lecture that in a number of ways central banks should have paid more attention to asset bubbles, which have high output costs. Asset prices, especially housing prices, should be identified as an explicit factor in the consideration of policy. More generally, central banks should adopt policies that 'lean against the wind'.