Peter Orszag has a great column out about New Zealand, which is really about the right way for political authorities to think about bubble concerns. The Reserve Bank of New Zealand had gotten worried about skyrocketing house prices. The basic concern about “bubbles” and financial stability that central banks are often encouraged to use as a pretext for tighter monetary policy. But instead of tight money, the Reserve Bank has responded with tighter mortgage regulation—basically requiring larger downpayments for most mortgages.
That limits the downside risk to the economy if house prices do crash in the future. And it might even restrain future price appreciation. But it doesn’t try to “prick” a bubble by creating more unemployment. That’s the way it should be done.
