The Global Financial Crisis and Housing
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The Global Financial Crisis and Housing

A New Policy Paradigm

Edited by Susan Wachter, Man Cho and Moon Joong Tcha

This innovative book analyses the role played by real estate markets in global financial stability and examines the fragile link between the two. Through what transmission channels do housing market cycles influence broader economic systems? How has the Global Financial Crisis shifted our view and understanding of these linkages? This detailed book answers these questions in an international comparative perspective. Specific topics covered include macroeconomic transmission channels of the housing cycle, the role of housing in the finance system, construction financing as a cycle amplifier, and various related public policy issues such as the policy remedies needed to deal with housing and mortgage-driven crises.
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Chapter 13: Dealing with real estate booms

Giovanni Dell'Ariccia and Deniz Igan


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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