{"id":18340,"date":"2012-04-10T22:14:16","date_gmt":"2012-04-11T02:14:16","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=18340"},"modified":"2012-04-10T22:14:16","modified_gmt":"2012-04-11T02:14:16","slug":"april-10-2012","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=18340","title":{"rendered":"April 10, 2012"},"content":{"rendered":"

A mention in the Globe & Mail<\/a> led me to an IMF publication (Chapter 3 of of the April, 2012, World Economic Outlook) titled Dealing with Household Debt<\/a>:<\/p>\n

Does household debt amplify downturns and weaken recoveries? Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted. These patterns are
\nconsistent with the predictions of recent theoretical models. Based on case studies, we find that government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt. In particular, bold household debt restructuring programs such as those implemented in the United States in the 1930s and in Iceland today can significantly reduce debt repayment burdens and the number of household defaults and foreclosures. Such policies can therefore help avert self-reinforcing cycles of household defaults, further house price declines, and additional contractions in output.
…<\/b>
Macroeconomic policies are a crucial element of forestalling excessive contractions in economic activity during episodes of household deleveraging. For example, monetary easing in economies in which mortgages typically have variable interest rates, as in the Scandinavian countries,
\ncan quickly reduce mortgage payments and avert household defaults. Similarly, fiscal transfers to households through social safety nets can boost households\u2019 incomes and improve their ability to service debt, as in the Scandinavian countries.<\/p><\/blockquote>\n

Clearly, it is better to avoid such a situation in the first place, but there is only ineffective policy in place in Canada to do so at this time. Buying a larger house (or a small house or condominium instead of renting) is a means of capital formation, which is encouraged by low interest rates. That’s what lower interest rates are supposed to do, for heaven’s sake! However, housing is non-productive capital; so much so that it can almost be considered consumption.<\/p>\n

So the question really is: in times of economic downturns, how should policy act to promote “good” capital formation as opposed to “bad” capital formation?<\/p>\n

I suggest that both monetary and fiscal policy are very blunt tools – too blunt to address the issue. Instead, a regulatory response is required:<\/p>\n