US Treasury Study: Macroprudential Policy Hasn’t Worked in the Past

Three economists at the Office of Financial Research of the US Treasury released a working paper today titled, “The History of Cyclical Macroprudential Policy in the United States.” Guess what? It hasn’t worked very well in the past. If it had, we wouldn’t be in this mess. This is from the paper’s abstract:

Since the financial crisis of 2007-2009, policymakers have debated the need for a new toolkit of cyclical “macroprudential” policies to constrain the build-up of risks in financial markets, for example, by dampening creditfueled asset bubbles. These discussions tend to ignore America’s long and varied history with many of the instruments under consideration to smooth the credit cycle, presumably because of their sparse usage in the last three decades. We provide the first comprehensive survey and historic narrative of these efforts. The tools whose background and use we describe include underwriting standards, reserve requirements, deposit rate ceilings, credit growth limits, supervisory pressure, and other financial regulatory policy actions.

Their conclusion: “Both the practical issues discussed above in regard to specific historical actions and the preliminary statistical analysis suggest that cyclical macroprudential actions may indeed be worthwhile, but they are also difficult to implement effectively and subject to many cross-currents in the economy that reduce their effectiveness.”