My Research On How to Prevent Bubbles
” This new research can’t prevent the mass contagions that lead to bubbles.”
Yes, but Lab experiments have provided guidelines that establish how to PREVENT BUBBLES: Stop or slow the flow of new money into the bubbling market!
We implemented the test in the lab by declaring a dividend yield on the asset after each trading period close, but NOT, as in the baseline protocols, paying it as cash into individual accounts & thus available for buying; rather we withheld payment unt…il the end of each experiment. Big bubbles in baseline; none in the treatment. A second treatment that paid half the cash dividend immediately into the accounts, gave us smaller bubbles than in baseline.
Vernon L. Smith, M. Van Boening and C. Wellford, 2000 “Dividend Timing and Behavior in Laboratory Asset Markets,” with Economic Theory, 16 (3) pp. 567-583.
How would that work in housing markets? Reduce the flow of new mortgage credit into the market; e.g., raise down payments. See S. Gjerstand and V. L. Smtih, RETHINKING HOUSING BUBBLES (Cambridge, 2014)
The bottom line is that you simply reduce the fuel that is enabling of the phenomena reported in Neuron.
So, interventionists, don’t do heavy-handed things to individuals, just cut down on their fuel!
Originally published on JasonZweig.com.