But now that you’ve clarified things, I think you probably included Rubin because he is a proponent of globalization and deregulated markets, two forces that will crush the effective protectionism inherent in unionized labor, so he deserves to be lumped in with the evil Republicans.

I get it. Thanks.

Well, there are quite a few more, but there are a few striking data points. One is that the destruction of the unions has always been one of the goal of the Republicans. A very recent data point is their very explicit statements by Republican leaders in the past few months that the automaker bankruptcies were a great opportunity to destroy union jobs.
Then there are the statements by UK ministers (of the Labour party nonetheless) that high immigration was designed to drive down wages in unionized sectors like health care.

But for a general statement of intent, Grover Norquist is a very good source:

http://www.enterstageright.com/archive/articles/0903/0903norquistinterview.htm
«The growth of the investor class–those 70 per cent of voters who own stock and are more opposed to taxes and regulations on business as a result — is strengthening the conservative movement. More gun owners, fewer labor union members, more homeschoolers, more property owners and a dwindling number of FDR-era Democrats all strengthen the conservative movement versus the Democrats.»

«Maybe I’m naive, but I’m more inclined to believe that was a consequence of the policies of our trading partners who intentionally devalued their currencies to facilitate exports to the U.S.»

The governments of the trading partners and of the USA had the same goal: more jobs for cheap, nonunionized Asian workers, fewer jobs for expensive, union USA workers. The Saudis, Japanese and Chinese governments have done whatever they could to get Republican (or “triangulating”) administrations elected, because of the similarity of interests.

Another factor in our current economic complications is that from before the collapse of the USSR in effect the cold war was over and the governments of the USA and Europe no longer had to worry about home front morale and expenses like a full employment policy, welfare or pensions.

You sound alot like Stephen Roach, which is a compliment, and I mostly agree. I’m not sure that busting unions and exporting American jobs was the explicit policy goal of American policymakers. Maybe I’m naive, but I’m more inclined to believe that was a consequence of the policies of our trading partners who intentionally devalued their currencies to facilitate exports to the U.S.

Those devaluation policies contributed to the U.S. running massive current account deficiits as Americans rationally preferred spending their money on “artificially” cheap imports rather than more expensive goods produced domestically. Of course, the other factor contributing to the current account deficits is our dependence on foreign energy. Whether we’re exporting dollars for cheap imported manufactured goods or foreign oil, all those newly exported dollars have to be recycled into dollar denominated assets. Treasuries and GSE agency backed MBS were the assets of choice due to their perceived low risk. So while Greenspan was hiking the fed funds rate from 1.0% to 5.25%, long rates and mortgage rates didn’t respond nearly as aggressively, in part because they were being held low by the demand created from the need to recyle those dollars. Thus, the famous Greenspan conundrum.

So, while Greenspan’s “ultra low interest rates” certainly contributed, they weren’t the sole cause. Thanks for the thoughtful and well reasoned response.

Here I feel compelled to make a very important point about the compensation of these hero producers and creators: they have been massively underpaid and overtaxed, and it is because of this that the financial crisis has happened. If the best and brightest had been given higher incentives and rewards proportional to all they have produced and created they would have done a better job of risk management.

With the underpayment and overtaxation caused by the socialist legacy of the New Deal and extreme leftists such as Clinton, they were not incentivized to aim for high risk adjusted returns, as it was hard work enough to aim for high absolute returns, which they delivered in massive amounts, way beyond their miserly compensation.

Once again this crisis shows that communism as that introduced by FDR never works, and only rewarding the best and brightest (produced income tax credits for incomes over $1m would be right) and discouraging the unproductive and uncreative (raise taxes on lower incomes up to $50k to at least 50-60% to tax poverty out of history) is the way forward.

The point I am making here by capitalizing “RETAIL” is that a large supply was the big deal, but also the WHOLESALE price of near zero in nominal terms (thanks to Japan for example, or the very generous purchase of Treasuries at very high prices by China, Arabia and Japan).

If you tell bonused/optioned bank executives that they can can borrow at 0-1% in one place unlimited amounts and lend at 3-5% somewhere else, they will see it as a giant cash-in opportunity for themselves, and will load their employers with “whatever it takes” toxic stuff at 3-5% as they can, because as long as they do that they are minting money for themselves at essentially zero risk to themselves.

A lot of the supposed “financial innovation” of the past 20 years was just opaque ways to arbitrage an unlimited supply of yen (and later dollars) into high-interest consumer credit, and damn the consequences.

The result has been an enormous contribution of productivity and creativity by heroes of capitalism like Mozilo, Fuld, Cayne, Skilling, Prince, Thain.

As to this, there have been enormous bubbles, especially housing bubbles, in several other countries, principally UK, Australia, Spain, Ireland.

The gigantic credit explosion was not so much fueled by low interest rates, but by the *availability* of credit. Even if RETAIL nominal interest rates in the USA had been 3-5% (as they were in UK, Australia, Spain, Ireland) there would have been credit driven bubbles, in part because even nominal rates of 3-5% were near zero or negative in real terms.

To some extent, as far as speculation goes, demand for credit is constrained more by the availability of supply than by its cost, and some things conspired to ensure a gigantic supply, whether or not nominal rates were near zero (USA) or not (UK, …):

* Supply is often risk-constrained. The USA and many other countries largely removed this constraint in various ways. Those governments did not remove the risk, they just removed the constraint.

* Supply was being provided in essentially unlimited quantities (and not just at a very low nominal price) the Japan. Sure, with a huge currency risk attached, but see the previous point.

* Supply was also being provided in essentially unlimited quantities (and not always at a low nominal price) in the USA too, as authorities sought to fund the rise of the FIRE sector as the new “locomotive” for the USA economy, and to export USA union jobs by providing a lot of (cheap) capital for export to India and China. Also for ideological reasons: providing endless credit is how the Republican party and a large number of Democrats earn their support from their sponsors.

In the rush, BarryR forgets about the even bigger role of Japanese zero interest rates, and the resulting yen carry trade, and the effective abolition of bank capital requirements for many types of assets in the USA.

Overall the picture he paints is correct: there was a gigantic surge of credit starting 1995-1996 (very clearly visible also in the graph of stock held on margin that he once published) and for most of the 15 years since then interest rates in the USA have been zero or negative in real terms, and Japanese rates zero in nominal terms, fueling a whole sequence of gigantic asset price bubbles in the USA (and job and investment bubbles in Asian and China).

«Why did interest rates of 2.5% to 4.25% induce bubbles in asset prices in Japan, but an interest rate of no more than 0.5% for almost 15 years has not?»

Many USA people forget that capital is global. The goal of the ZIRP in Japan was not to fuel a second asset price bubble, as the balance sheets of Japanese banks had been brutalized by the previous bubble’s debt deflation. Also, who get credit for what reason at what price is driven by politics in Japan, not just in the USA, and the policy goal of the Japanese ZIRP was to drive exchange rates to support exports, not to enrich asset speculators again. “Administrative guidance” works in Japan, just as it works in the USA.

Conversely, the policy goal of the Greenspan/Gingrich/Rubin/Gramm credit explosion in the USA was exactly the opposite: to drive up USA imports, as a way to destroy unions by exporting union jobs from the USA to non-union countries (and to a very modest extent to non-union areas in the USA itself), and to boost asset prices to create huge financial sector profits and to create capital gains to support baby boomer retirements. Thus in the USA “administrative guidance” has ensured that most of the credit bubble has gone to USA banks and the shadow banking system (can *you* borrow at 0% from Fed or use TALF to get rid of your bad assets?).

~~~

BR: Fannie has been a poorly managed disaster for a long time. They were not the cause of the boom and bust or the credit crisis, but a wholly separate nightmare of accounting fraud and shareholder theft, run by poitical hacks and weasels.

@ Groty

Not speaking for Barry, but I believe there is some misunderstanding about Greenspan’s role – it was far deeper and more insidious than simply lowering interest rates. In the U.S. case it was the culmination of Greenspan’s beliefs in A) deregulation, B) corporate profits at the expense of the working class, and C) the lowering of interest rates that perpetuated the demise.

By defending and promoting Reagan-era supply-side economic ideology, Greenspan became a key player in the destruction of the U.S. working class by promoting productivity gains be held primarily by the wealthy and the corporate entities, ensuring a redistribution of wealth and in effect creating a productivity gap for the American worker – which was filled for a time by new and heavy borrowing.

The Greenspan rates allowed this excessive borrowing that filled the void left by productivity gains of which the American worker did not share. Because they did not share the productivity gains, the U.S. worker could not afford to service the incurred debt.

That is the real story of Greenspan’s rates. If rates had been kept high, not only would the housing and credit bubble have been impossible to form, but Americans would have discovered long ago that the lifestyles they had long been accustomed to were no longer sustainable – their efforts and labor having been sacrificed to Ayn Rand’s false god of noble greed, whose high priests thrived on Wall Street, subverted the U.S. Congress, and came close to destroying a nation.