From Alan Mitchell at the AFR:
What is it about macroprudential policy that has captured the public’s imagination?
Perhaps it’s just a sense that, if the New Zealanders are doing it and the Americans are embracing it, we should do it too. Or maybe it’s a yearning for a return to the seemingly more secure age of regulation and credit rationing.
…Here’s a question: if New Zealand-style macroprudential black-letter regulation is such a no-brainer, why are central banks and regulators only getting round to using it now? The answer, is that people are turning to it reluctantly because they have no choice.
Public imagination, Alan? When was the last time you heard the words “macroprudential” muttered down the pub? It has barely gotten off the ground in the press either. I had a chat with senior business editor the other day who had never heard of it. The reform is being driven by MB, Callam Pickering at BS and a growing clique of policy elite. One wonders why Mitchell feels the need to misrepresent it as some popular delusion. It kind of looks like he and the RBA inner circle are enjoying a little wisecrack at our expense. Ha! Very good, very droll, and all of that.
Now, back to the issue at hand, Mitchell goes on with the standard objections:
…ramping up the capital that banks must have for housing loans makes mortgage loans less profitable and that, you would think, should take some of the heat out of the property market. But what if it leads the banks to make riskier loans to restore their profitability?
Then there is the problem of calibration: how much do you use for a given problem? Use too little and the market keeps galloping away from you; make it a bit tighter and you can create the market crash that you are trying to avoid. There also is a well known and more insidious problem with regulation. People quickly start finding their way around it. Hello shadow banking!
And? We need the banks to making riskier loans, to business not households. Calibration is solved easily by beginning small and building up and if you trigger a crash then it was going to come anyway only later when it was bigger still. As for shadow banking, it will take years to built alternatives of substance. Besides, MP is being proposed as a temporary solution to extant problems, even in NZ, where it is full swing.
Do these these quite manageable risks outweigh the already obvious reality that tradabales are being hollowed out and housing is in a renewed bubble? Clearly not.
