Must-Read: Barry Eichengreen: The Promise and Peril of Macroprudential Policy: “Central bankers continue to fret about frothy asset markets — as well they should…

…What, if anything, should be done to minimize the risks of a rapid and sharp asset-price reversal? For many years, this question was framed according to… ‘lean versus clean’…. Should central banks ‘lean’ against bubbles… or just clean up the mess after bubbles burst?… 2008–2009… demonstrated [that] merely cleaning up after the bubbles burst is very costly…. So what should central bankers do instead?… Specially tailored financial tools… raising banks’ capital requirements when credit is booming… [to] restrain lending and strengthen banks’ cushion… setting ceilings on loan-to-value ratios…. Unlike such tools, interest-rate policy is a blunt instrument… [and] interfere[s] with the central bank’s primary objective of keeping inflation near target. Unfortunately, the development and use of macroprudential tools faces considerable economic and political obstacles…. Once a mania gets underway, the temptation to join is simply too strong…. [Where] homeownership [becomes] virtually an entitlement, measures making it more difficult would whip up a political firestorm…. Policymakers should respond to these challenges by working hard not only to develop effective macroprudential tools, but also to demonstrate that they can be deployed evenhandedly… the process will take time. In the meantime, situations may arise in which the interest rate is the only instrument available…
https://www.project-syndicate.org/commentary/macroprudential-policy-by-barry-eichengreen-2015-08