I think that this is a good rebuttal to the “Just make it tradable, and your problems go away” school of regulation.

Things like “Carbon Trading” encourage speculative money flows that eventually overwhelm the process for which the markets were created.

Economics Blog : Why Bernanke’s Great Depression Research Matters Today
–Greg Ip

Ideas that Ben Bernanke pioneered years before becoming Federal Reserve Chairman could prove important in evaluating how financial stress, such as the subprime mortgage mess, affects the economy.

Since becoming Fed Chairman, Mr. Bernanke has spoken on countless issues ranging from China’s economy to free trade. But to understand where his economic heart truly lies, read the speech he delivered at the Atlanta Fed today, “The Financial Accelerator and the Credit Channel.”

As an academic in the early 1980s, Mr. Bernanke pioneered the idea that the financial markets, rather than a neutral player in business cycles, could significantly amplify booms and busts. Widespread failures by banks could aggravate a downturn, as could a decline in creditworthiness by consumers or businesses, rendering them unable to borrow. Mr. Bernanke employed this “financial accelerator” theory to explain the extraordinary depth and duration of the Great Depression. (Much of that work was done with New York University’s Mark Gertler, now a visiting scholar at the New York Fed.)

A lot has changed since the 1930s, but the financial accelerator is still relevant. Although Mr. Bernanke doesn’t say so specifically, the record level of consumer leverage today means a change in asset prices (such as homes or stocks) can produce a much larger change in consumers’ net worth, and as a result their ability to borrow and spend. “If the financial accelerator hypothesis is correct, changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect,” that is, the tendency of a changes in asset prices to make consumers feel more or less wealthy, and thus spend differently. That is because “changes in homeowners’ net worth also affect their … costs of credit.”

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