HOW TO TACKLE THE HOUSING BUBBLE?
Three theories for tackling the housing bubble: 1. Bubble prevention/deflating bubble Based on the belief that a bubble bursting is hugely harmful. Brennan found, after the dot-com bubble burst, the stock market took three and a half years to recover. Source: Brennan (2004) 2. Maintenance bubble Quinn and Turner argue that not all bubbles are highly destructive. Some may even have positive social impacts, such as encouraging innovation and financing projects with high capital requirements. To prevent the recurrence of bubbles, Brennan argues that transparency and investor cognition should be improved. Transparency: keep prices close to fundamentals, and prevent fraud. Cognition: reduce irrational behaviour. Deflate or maintain the bubble: Core: calm overheated investment sentiment while preventing it from falling too fast (to ensure that the overheated economy is supported by sufficient cash flow). Approach: Money/credit: raise ...
