The policymaker could point out the assumptions embedded in the rapid rise in asset prices and question the accuracy of the assumptions. Obviously, the policymaker might be ridiculed by true believers about the lack of understanding about the important nature of the innovation. But I suspect that over time, a proactive central bank that laid out the risks clearly would gradually gain credibility with market participants. Use of the bully pulpit would allow the central bank to signal its concern. This might shift the risk/reward trade-off by raising the risks that the talk might foreshadow more forceful action. That, by itself, could temper behavior. Announcement effects can be very powerful, especially when they can be followed by changes in policy. The second set of tools includes those that are macroprudential in nature. I would define macroprudential tools as regulatory and supervisory actions that are not applied on a firmspecific basis. These include tools designed to temper demand or increase supply in the asset subject to the bubble or to increase the ability of skeptics to take the other side of the market in which the bubble may be occurring. For example, to counteract a housing bubble,  8  This argument has been made by many others. See, for example, Frederic Mishkin. How Should We Respond to Asset Bubbles? May 15, 2008. 9  An example of a sustained rise in asset prices that was not a bubble is the bull market in U.S. equities that began in the 1950s.
Sharp fluctuations in market rates are a possibility. This is a fact banks must bear in mind when managing interest rate risks. BIS Review 86/2005  3