The risks of macroprudential

Dr Justin Pyvis Dr Justin's picture

Arnold Kling has a very interesting theory about the state of the United States economy.

"I think that back then [2008-09] there was a sudden political regime shift. The politicians had been telling mortgage lenders, “Don’t you dare turn anyone down for a mortgage.” Then, all of a sudden, as Erdmann put it, “After mid-2008, we effectively made it illegal for two-thirds of the country to get a mortgage.” That sharp change from one regime to another adversely affected many patterns of specialization and trade, some directly and some indirectly. When patterns became unsustainable, unemployment resulted. It took a long time for new patterns to be established."

Australia and Canada - homes to some of the most unaffordable property in the world (Sydney is #2, Vancouver #3) - did not have political regime shifts and so avoided the same fate as the United States. Indeed, politicians, central bankers and the like doubled down on housing, so as you would expect prices barely fell at all.

But today we have rising interest rates in the United States - Australian and Canadian banks still rely on global wholesale funding - at the same time as local politicians and bureaucrats are pushing through 'macroprudential' regulations designed to slow house price growth. Unless something changes, it won't be long for miscalculations in their respective housing markets to be exposed, leaving the property-exposed banks in potentially deep trouble.