Researchers: Monetary Policy Not Enough to Prevent Bubbles

National monetary policy alone cannot reliably prevent or reverse housing bubbles, according to a recent report from the Lincoln Institute of Land Policy. The downfall lies in the fact that housing prices and housing markets vary widely across the country, stated the researchers in the report. Monetary policy and large national programs such as the Home Affordable Modification Program (HAMP) may help some markets while hurting others, according to the report, , Preventing House Price Bubbles: Lessons from the 2006-2012 Bust.

Researchers from the Lincoln Institute of Land Policy offer a solution: local countercyclical capital policies.

“The basic idea is straightforward: when prices for a particular asset or sector are rising much faster than market fundamentals justify, bank regulators would increase the capital ratios for that asset,” the researchers explained.

Higher capital reserves make a bank safer and increase mortgage costs, dampening demand, according to the report.

The articles goes on to explain how this solution would help mitigate a the size of the bubble and it does make a good point.

However, they also point out - One of the obstacles to such a policy, the researchers stated, is “there will always be resistance to raising capital requirements when times appear to be good.”

Source: DS News