Tuesday, July 27, 2010;
Some suggested measures to control systemic risk by limiting credit and asset bubbles:
Force homeowners and investors to make larger down payments on property.
Pro: Protects banks by ensuring that mortgage holders have more equity, and cools property markets by slowing demand.
Con: Prevents some creditworthy buyers from obtaining loans if they cannot save enough for the down payment.
Force banks to set aside more capital during good times.
Pro: Keeps institutions from lending too freely when property markets are overheating, and builds up capital reserves to help banks through downturns.
Con: Like any "counterycyclical" policy, risks limiting otherwise healthy economic growth.
Raise interest rates.
Pro: Slows lending and borrowing by increasing the cost.
Con: Traditionally, central banks have used interest-rate policy to regulate the overall economy. Using it to focus on problems in specific sectors, such as real estate, might undercut those other aims.