Since the idea of macro-prudential regulation was first raised, I have pointed out there is no reason to expect it to work.
Why did I take this extreme position?
First, because monetary policy is a source of systemic risk. It is impossible for the macro-prudential regulators to offset this risk. As Larry Elliott observed,
But although the Bank has become more powerful it has also become more vulnerable. The tools used to manage the economy – ultra low interest rates and quantitative easing – have not led to a sustainable recovery. Rather, they have led to booming asset prices and excessively strong credit growth. In recent months, the Bank has been publicly voicing concerns about the 10% annual increase in unsecured borrowing but this is, to be frank, a bit rich. Credit is growing fast because 0.25% interest rates, QE and inducements to the commercial banks to lend have made borrowing easy and cheap. Put simply, the Bank’s financial policy committee is now trying to mop up the problems caused by the Bank’s monetary policy committee.
Second, because central bankers are not infallible. Across the developed markets, they failed to understand what was happening when the financial crisis began on August 9, 2007.
Central banks failed to spot the last crisis coming, assuming wrongly that excessive credit growth didn’t matter because inflation was low. The tools banks deployed to deal with the crisis of a decade ago have boosted asset prices but not the real spending power of ordinary citizens. Household debt is rising and the whiff of Groundhog Day is unmistakable. All this at a time when voters cut elites far less slack than they once did.
Third, because central banks are captured by the bankers they supervise. Central bankers chose policies to respond to the financial crisis whose primary purpose was to protect the banks and bankers’ bonuses rather than protect the real economy.
In short, there is no reason to expect central bankers to see the next financial crisis coming or to respond in a way that benefits the real economy.