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 (e.g., by lower loan-to-value ceilings for investors with multiple mortgage liens outstanding), this might have limited the size of the boom and subsequent bust. My own view is that while the use of macroprudential tools holds promise, we are a long way from being able to successfully use such tools in the United States. There are two major sets of difficulties. First, unlike monetary policy and microprudential regulation, there is not a welldefined framework for identifying emerging imbalances and applying macroprudential tools in response. A recent tabletop exercise conducted by a number of Federal Reserve Bank presidents, which I will discuss a bit later, indicates some of the difficulties here.
First, I will discuss briefly what we learned at tabletop exercise with a number of Federal Reserve Bank presidents concerning the potential use of macroprudential tools in response to sectoral imbalances. I think the tabletop exercise underscores the difficulty of using macroprudential tools in practice in the United States. Second, I will discuss the issue that Adam Posen has raised – whether we should focus on the use of rules that are hardwired into the financial system ex ante or instead favor using macroprudential tools in a more discretionary, ex post basis, once particular problems have been identified. In the tabletop exercise, the five Federal Reserve Bank presidents who are members of the Subcommittee on Financial Stability of the Conference of Presidents discussed the best way to respond to a scenario in which the commercial real estate market was overheating.2 The scenario was much more detailed than that, but the commercial real estate sector was the major problem with respect to financial stability. The stated goal of the exercise was to reduce the risk posed by the commercial real estate boom to financial stability and, by extension, to the Federal Reserve’s ability to achieve its macroeconomic objectives of maximum sustainable employment and price stability. Prudential tools under consideration included:  2  2  See Macroprudential Policy: Case Study from a Tabletop Exercise, Tobias Adrian, Patrick de Foutnouvelle, Emily Yang, and Andrei Zlate, Federal Reserve Bank of New York Staff Report No. 742, September 2015.