We need effective regulation of speculative borrowing
December 5, 2011
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NY Fed’s blog Liberty Street provides new evidence on the extent of speculative positions in the latest housing bubble in the US. Combining new data sources they find that … investors were much more important in the housing boom and bust during the 2000s than previously thought.
At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half—45 percent. Investor shares roughly doubled between 2000 and 2006.
They conclude that… investors were much more important in the housing boom and bust during the 2000s than previously thought.
What can be cone? Their observation is that … Effective regulation of speculative borrowing, like what is being attempted in China today, may be needed to prevent this kind of crisis from recurring.
On the same topic, see also the recent speech by FSA chairman Adair Turner where he notes that …
The crucial factor at work is the interaction between credit creation and asset prices, an interaction which creates the potential for what Hyman Minsky called “speculative” and eventually “ponzi” finance … and
That implies that macroprudential policy must be based on judgements about the optimal aggregate quantity of credit creation: and that we need to consider carefully how far we can and should make judgements about the economic value of different categories of credit, which in the recent past we have largely avoided.