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Housing Bubbles as Economic Policy

 

I’m curious why governments around the world are fond of pursuing higher house prices as economic policy. Not that I have anything in principle against higher house prices. I understand why governments want to do it, housing is an important concern for many people and a significant contributor to an economy. But all of that is wasted if the policies stimulate a housing bubble that eventually bursts leaving people poorer because their main asset drastically falls in value. But I’m concerned that governments introduce significant economic risk to the whole economy by promoting housing bubbles. We saw this with the recent Great Recession that consumed the US and much of the world in 2008-09. Yet governments continue to inflate housing bubbles. In the end, we are worse off when a housing bubble pops. I’m no ‘economic girly man‘ when it comes to risk, but surely as stakeholders in the global economy (and voters, depending on where you are) shouldn’t we be cognisant of the risks that our governments introduce? That way if we know about it, we can demand our governments to manage or even prevent these risks. This post will attempt to identify the key ways that governments have introduced risks into our economies in order to stimulate housing bubble.

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Study of Incentives wins the 2014 Nobel Prize in Economics

I was so excited to find out this morning that Jean Tirole won the 2014 Nobel Prize in Economics. When I think of Prof. Tirole, I usually think of him together with his long-time collaborator, Jean-Jacques Laffont, who unfortunately passed away in 2004. Together, Tirole and Laffont wrote some insightful economic analysis that has heavily influenced my thinking on economics and, judging from the tributes (e.g. here from Justin Wolfers), many other economists. So, my excitement was tinged with a bit of sadness that Prof. Laffont did not see this day when the hard work of him and Prof. Tirole was recognised as worthy of the Nobel Prize. There work, applied game theory, principal-agent theory, asymmetric information and contract theory to how markets in the real world work. They did this by understanding the incentives between buyers and sellers in these markets instead of assuming that all markets were perfectly competitive. And, importantly they also looked at if it was feasible if government could intervene in markets that were imperfect. Tirole and Laffont have definitely influenced many regulators and policy-makers, and I’m glad Prof. Tirole won the Nobel Prize now because I think some of his and Laffont’s insights bear repeating. (more…)