Q. So with all the talk about QE and tapering has also come talk of “Macro-prudential” central bank policy… what’s that about?
A. Obviously, most tools the Fed has are very blunt — injecting or withdrawing overall liquidity. But what if it sees a bubble in just one part of the market, and doesn’t want to hurt the overall economy by raising interest rates just to get at that one sector? That’s the idea of macroprudential policy: specific central bank tools for specific subsectors of the economy.

Q. So… how about some examples?
A. The best ones concern housing. So, for example, the South Korean Central Bank specifically targeted a bubble in real estate in the fashionable Gangnam district by raising down payment minimums there. Israel and Canada central banks have tried similar things, with mixed results.

Q. And how about here? Has the Fed tried Macroprudential policies in the past?
A. Yes, going back quite a ways. It tried to suppress the 29 stock bubble by raising bank interest rates for stock loans— but other lenders stepped in, and the bubble kept going. More recently, in the early 80s, it tried to tame inflation by imposing higher reserve requirements on banks issuing credit cards and personal loans. That worked a little too well, and set off a recession.

Q. And obviously, there are also the politics to worry about…
A. Absolutely. Hard for any one group to complain when overall rates are raised and lowered, but imposing different rules or rates in a specific sector would obviously cause all sorts of political charges about government control of the economy, which has happened in previous efforts.

Q. So although it sounds great for the Fed to have more precise tools to use than QE and then tapering, tough to really pull it off.
A. Yep. The IMF and a lot of economists are big fans of the basic idea, but an awful lot of practical barriers to the Fed turning back to macroprudential policy anytime soon.