william c dudley : is the active use of macroprudential tools institutionally realistic? panel remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the “ macroprudential monetary policy ”, 59th economic conference of the federal reserve bank of boston, boston, massachusetts, 3 october 2015. * * * it is a pleasure to be here today and to have the opportunity to talk about the potential use of macroprudential tools in the united states. before i respond to adam posen, i ’ d like to make a few general comments on macroprudential tools. i am interested in such tools both as a u. s. policymaker and in my role as chair of the committee on the global financial system of the bank for international settlements ( bis ), a body that has done considerable work in this area in recent years. what i have to say today represents my own views and not necessarily those of the federal reserve system. 1 the use of macroprudential tools has gotten considerable attention for several reasons. some countries have implemented macroprudential measures with respect to the housing market that may have limited the extent of home price appreciation and made their financial systems more resilient when the boom unwound. other countries have implemented countercyclical capital requirements that have made their banking systems more resilient. thus, the hope is that u. s. policymakers can learn from these international experiences and incorporate effective macroprudential tools into our toolkit that could be used to limit financial stability risks. support for using macroprudential tools in the united states has also been bolstered by our experience during the financial crisis. the u. s. housing boom and subsequent bust might have been less severe had a set of macroprudential measures been in place at the time to limit the degree of leverage and speculative activity in the housing sector. the housing boom was fueled by optimistic expectations for house price appreciation, combined with lax underwriting standards embodied in such practices as no - doc mortgages and widespread speculative activity by investors. i remember, for example, the website, condoflip. com, which says it all in terms of the degree of speculative fervor that was evident at the time. if underwriting practices had been held to high standards ( e. g., strict mortgage service - toincome ratio limits had been honored ) and speculative activity had been constrained (

housing boom, limits on subprime lending would undoubtedly have provoked the objection that the regulators ’ actions would limit home ownership for low - and moderate - income families. imposing automatic, countercyclical standards also has this difficulty to some degree. but i think it is much less severe because at the time such standards are put in place, they generally will not be binding and it will be unclear whether they will necessarily become either more stringent or more binding in the future. in other words, the rule ’ s potential impact will be highly speculative and uncertain at the time of implementation. this may lessen the political opposition to putting such a rule in place. in the same vein, automatic rules that are imposed ex ante might also be less risky in terms of potential unintended consequences. when new rules are implemented it is always hard to gauge what the impact will be because imposition of the rule not only changes the economics of borrowing and investing in a particular sector, but also changes expectations about what might happen in the future. when the rule is viewed as likely to be binding in the future – this seems more likely in the case of the ex post measures – it will be very hard to judge how economic agents will respond to a new measure. in this regard, i think back to the carter administration and the imposition of credit controls to restrain inflation in 1980. even though the credit controls were not expected to bind right bis central bankers ’ speeches away, the economy began to contract almost immediately as households and businesses rapidly adjusted their behavior to preserve some credit capacity. the response was a much more powerful downturn in economic activity than had been anticipated, which forced the carter administration to scrap the credit controls because they worked too well in restraining economic activity. so i see some potential advantages of hardwired rules. but, i think this advantage needs to be set against the practical difficulty of figuring out what rules would need to be in place now to deal with all the potential financial stability excesses that could occur in the future. that seems a very difficult task to work out in my opinion. it implies that such rules would need to be designed to treat broad issues, such as increases in financial system leverage or aggregate credit growth, rather than more limited sectoral issues. this may work well in some circumstances in which the financial excess is occurring broadly, but might not be very effective when the problem, while extreme, may be more narrowly based. historical experience suggests that past bubbles in the united states that