Posted Monday, July 23, 2012, at 3:52 PM
I was wondering last week what advice you would give the prime minister of a country that, like Norway or Canada, looks to most foreign observers to be in the middle of an unsustainable housing price bubble.
Miles Kimball offers some good ideas but still leaves me with the overall impression that recognizing that there's probably a problem here is no panacea.
His first point is that a price boom is a great time to pare back or eliminate unwise subsidies like the home mortgage interest tax deduction. This is actually something the Bush administration did with a tax-reform commission in 2005, which gave Democrats the opportunity to complain. Then Republicans in Congress and the White House rapidly abandoned it. But a good idea. Kimball also says you could enact regulatory restrictions on low down-payment mortgages. That is definitely a good idea, although again one wonders what the political constituency is. Person A wants to sell a house, Person B wants to buy a house, and a bank wants to lend Person B the money to buy the house from Person A. But the government is going to step in and say it can't be done? Seems unfair! But absolutely, yes, if possible allowable leverage ratios should be countercyclical. Third is the idea of more systematic reform of how mortgage finance works. As Robert Shiller has argued in a line of recent books, the basic mortgage product doesn't need to be something where all the downside risk is on the borrower.
These are all good ideas, but a point I would make about them is that they're basically "now more than ever" proposals to improve the way housing finance works. They're not really specific policy responses whose merits hinge on whether you recognize the existence of a house price bubble. As policy recommendations, that's part of their strength. These are good things to do that don't hinge on the tough work of bubble-spotting. But I think it also means that post-bubble people may be spending too much time thinking about bubble-spotting and not enough time thinking about general robustness of institutions.