Saturday, May 30, 2009

But we believe house price bubbles can be identified. We think it’s obviously worth trying.


"Global Property Guide Blog

I regret that Paul Krugman isn’t in Obama’s cabinet, in addition to, but not instead of, all these Wall Street brainboxes who partly got us into the mess we’re in today.

Krugman’s last two pieces have been among his best. First, a plea that once over the crisis, we should not put off financial reform. The present disaster has been long brewing, we’ve seen it coming – and we’ve done nothing.

Second, a call to avoid Roosevelt’s initial fiscal caution. “You cannot spend your way out of this recession,” say the Hayeckians. Sorry, wrong. That’s exactly what you must do. Spend!

While waiting for Oracle Krugman to pronounce what regulatory measures he has in mind, at the Global Property Guide we take a housing market-centric view. Here’s what we say:

  • Housing booms have been forerunners of almost all recent economic busts. Housing busts are lethal for banking systems, and in turn kill the economy.
  • Houses are our biggest financial institutions, our biggest store of savings. Moderating the cyclical upswings and downswings of these boxes we live in should be right at the top of our regulatory priorities.

The outlines of a solution could be:

  1. There’s no particular reason why regulators shouldn’t require institutions making mortgage loans to borrow long, and lend long. So - provide structural encouragement to a shift from short-term to long-term mortgage lending, thus decreasing economic volatility (short rates always move more aggressively than long).
  2. Increase capital adequacy requirements throughout the system. Frown on off-balance sheet assets, on the model of the Bank of Spain.
  3. Ask your central bank to explicitly target housing price stability, as one of its objectives. The Bank for International Settlements has been quietly nudging the world in this direction, but the idea hasn’t taken hold yet.

Of course, it’s tougher targeting long-term average house-price stability, than targeting the consumer price index (CPI). It is immediately obvious when the CPI gets off track, while house prices move in 10-15 year cycles, and ‘fundamental’ reasons can often be adduced for these cycles.

But we believe house price bubbles can be identified. We think it’s obviously worth trying. Or do you want to go through this all over again, in another 20 years?"

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