Although theoretically central banks use their regulatory and supervisory authority to eradicate excesses in specific markets and use monetary policy to take care of inflation and employment, these tools do not always work as well in practice. Years of trying such macroprudential policies as credit controls and down-payment limits have shown that these policies are often circumvented by regulatory arbitrage or repealed under political pressure.

Supervisory pressure, reserve requirements, and interest rate ceilings, for example, can be successful in reducing bank lending. But they tend to have little impact on the overall lending levels because of other lenders entering the markets that are not subject to these regulations. Tightening credit controls works better and generally causes the demand for credit to slow. Although direct restraints are still in force elsewhere, the United States removed most direct restraints on credit in the 1980s, and it is unlikely that they will be re-introduced. The reason is that the introduction of such restraints would require cooperation between multiple regulators across multiple markets, which would be more difficult to achieve than making the financial system more resilient.

The points made in this article are interesting and show clearly how credit restraints have a better chance of having an effect than reserve requirements and interest rate ceilings. Hopefully, U.S. regulators will manage to make the financial system more resilient before the next bubble.