A New Policy Paradigm
KDI series in Economic Policy and Development
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Until the global financial crisis, the main policy tenet in dealing with a real estate boom was one of "benign neglect" (Bernanke, 2002). The widespread consensus was that it was better to wait for the bust and pick up the pieces than to attempt to prevent the boom. This was based on two assumptions. First, the belief that it is extremely difficult to identify unsustainable real estate booms, or "bubbles", in real time. Second, the notion that the distortions associated with preventing a boom outweigh the costs of cleaning up after a bust. The crisis has challenged this view. Post-bust policy intervention was of limited effectiveness and, thus, the costs associated with this particular bust were daunting. While early intervention may engender its own distortions, it may be best to undertake policy action on the basis of a judgment call (as with inflation) if there is a real risk that inaction could result in catastrophe. Yet, a call for a more preventive policy action raises more questions than it provides answers.
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