For stocks, that would be easy – increase the margin requirements. That would be a good idea anyway. Why anyone in the world is allowed to borrow money to buy stocks is more than I can understand.

There are at least two ways to pop a housing bubble or a commercial real estate bubble that wouldn’t involve monetary policy – one increase the amount of down payment required, or, two, require banks to keep larger loan reserves for housing mortgages.

All of these solutions could easily be implemented without any additional legislation. What we have here is a failure of will in the regulators.

Your blog from July 2nd offered up a link to an interesting article co-authored by Anil Kashyap. Wasn’t that paper at least aiming at macroprudential measures? – though as you point out (bang on I think), its major weakness is its disconnect with political economy. To me, this is exactly where theoretical evolution is needed. On the other hand, the idea that ‘if the fed can’t spot the financial bubbles (of nature) than no can’, reminds me that I better get back to my secretary job on the double.:) But then, (I love the internet) I read that the Vatican http://www.nytimes.com/2009/07/08/world/europe/08pope.html
is doling out advice to economists leading our world economy – god knows where! Funny that Hobbes was trying to get away from divinely inspired leadership. Should we really place all our hope with the superstars at the Fed and just watch the tides?:)

MC Morley

Bubbles are book-keeping 101. A proper book-keeping defines asset value and assigns liability’s identity. In a bubble assets have been improperly defined. The imaginary $ assigned to liability has no meaningful calories. It is like eating junk food and expecting to be nourished. The “financial industry” as they like to call themselves shows very little sign of doing a proper book-keeping. Until rigorous double-entry book-keeping has a real asset for every liability on its books, you are going to have a bubble that in time will burst.
Dan Palanza

I think that we are on the cusp of a greater decline than last Fall’s, all things considered. The green shoots are now dead, so what’s the point in rhetoric which takes us nowhere in the current sense. Dudley is achieving didley by filling the air with the useless sounds of his flapping lips. We need some economic psychologist to step to the forefront and create a sane playing field. Right now, it’s so slanted that the players can’t stand up.

http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/07/what-monetary-policy-cannot-do-and-so-cannot-be-blamed-for-having-done.html

“What monetary policy cannot do, and so cannot be blamed for having done

We have learned, after long and painful lessons, that there are some good things we wish that monetary policy could do that monetary policy in fact cannot do.

But we don’t seem to have learned the corollary to that lesson: by exactly the same argument, there are also some bad things that monetary policy gets blamed for having done that monetary policy in fact cannot have done.

I have stolen the title for this post from Milton Friedman. “What monetary policy cannot do” is a section heading from what is probably the single most influential paper on monetary policy in the last 50 years, “The role of monetary policy” (pdf). It is true that Mises and Hayek for example had previously made essentially the same point, but Friedman made it more clearly, and had a much greater influence on our way of thinking.”

Here’s my point there:

How would this work? Mortgage rates come down, say. Now, for some people, it will indeed be prudent and wise to buy a house when mortgage rates come down. However, it will not take long for this prudent investment to become dicey if home prices rise faster than other prices. Apparently, Glaeser says that Interest Rates can only account for at most 20% of the housing bubble. Even that seems high to me.

So, at the beginning of a bubble, there will exist a certain amount of prudent and sensible investing. Can we really call that the cause of a bubble? It certainly comes first in time, and often leads to home prices going up. But I can’t, in good conscience, call this prudent behavior a cause of the bubble.

I think that Angelo Mozilo, yes, that Angelo Mozilo, gave my view of the bubble when he testified before congress:

http://oversight.house.gov/documents/20080307121803.pdf

“In June 2004, however, the Fed commenced what turned out to be 17 consecutive
interest rate increases. The combination of increasing interest rates and higher
home prices initially prompted a still higher spike in demand, as many borrowers
rushed to buy homes for fear of getting priced out of the market.”

There’s no way to make this prudent. In fact, it takes a cock and bull story to justify it. In my view, the story went like this:

1. You cannot count on the govt for retirement.
2. You cannot seem to save for retirement.
3. You can buy rather than rent, and turn a cost into an investment.
4. Housing prices are not coming down, so, if you don’t but now, then you never will.

It’s a story of fear and panic, the fertile grounds where fraud and foolishness can plant themselves. Oddly, Mozilo gets closer to the truth than most economists.”

The low interest rate argument doesn’t work. Neither will bursting bubbles by using the Fed’s short term interest rates. In fact, rates were rising during some of the years with the worst loans. Let me quote Burke:

“History is a preceptor of prudence, not of principles.”

I would also recommend this post:

http://online.wsj.com/article/SB124657539489189043.html

“New Evidence on the Foreclosure Crisis
Zero money down, not subprime loans, led to the mortgage meltdown.
By STAN LIEBOWITZ”

You can still help the less fortunate, by providing a cash subsidy for housing. That’s a much cleaner solution than messing with down payment requirements.

It is also true that zoning and regulations can cause housing prices to rise. However, that it entirely separate from the question of sensible lending practices.

Nope. It wasn’t a housing bubble, but rather a land bubble. The fact that land is in fixed supply, and that land in “desirable” places is especially coveted, is why “housing” prices go up with income.

Of course, stupid development restrictions (e.g. on density) make matters worse.

Huh? “Low, simple, and fair” are not consistent.

The fairest tax is the tax on land value. It’s also very simple, and very difficult to evade. It’s also fair for the land tax rate to be set very high, because landowners as landowners don’t create any value at all.

In other words, there will either be perfect equilibrium, or a bubble(s). So the idea that we can eliminate or prevent all bubbles is illusory.

Given that, the question before us should be how to minimize bubbles, and how to isolate their impact.

As always, I think we need to start with reducing leverage and complexity.

Complexity feeds bubbles by obscuring their existence through a reduction in market information. Leverage is the mechanism by which they metastasize.

Focussing on these two problems would be a good place to start.