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I agree with what you call short-termism. In a rational world, the government would be selling long bonds at these historically low rates in order to lock them in. But that is not what is happening. I forget the exact numbers, but a 1% overall rise in the rate that the government pays for money is around $ 200 billion annually. So there is that very powerful incentive to keep the price of money low.
Stan, Doc or Jeff may remember it differently, but, in 1980, both parties ran a campaign that basically said, "we are in trouble, and to cure inflation, we are going to have some pain." Carter had his "malaise" speech, and Reagan was no breath of sunshine. I had a CD in those years that had an 18% rate, and you could peel off the price stickers on canned goods and actually see how they had increased in price. My recollection is that the public in general accepted that the medicine was going to be unpleasant.
I don't understand the part about "kicking out a leg of it's own stool", and there was no "shortage of solid investments" (iconic companies started or took off in the period 2002-2007), but your underlying indictment is correct. There was a lot of money to be made on derivatives and other forms of "financial engineering". The government didn't lack oversight, in fact, it was promoting the process. What could be safer than a small percentage of a large pool of residential mortgages is an era when mortgages were at least at 8%. There was so much money to be made that the persons whose job it was to assess risk either didn't do it or were overruled by higher-ups. The rating agencies were certainly complicit, and real estate appraisers either over-appraised property or lost their clientele. And the ultimate backstop to it all was the ability of banks and other financial institutions to sell their mortgages at face value to Fanny or Freddy.
Hack, you really have something when you say that folks were relying on home equity as their store of capital. That produced the "wealth effect" and folks overspent. Very low-interest rates are a way of taking money from savers and giving it to spenders. That should be good for the economy.
If I were you young bucks, I'd be paying close attention to your 401(k)s and IRAs. Ultimately, correct economic theory has to result in predictions. The biggest pot of money I see out there is the tax-advantaged retirement plan. They are today what home equity was 10-20 years ago. And here the government already has a hook into them because they are "subsidized" by being tax-free.
Stan, Doc or Jeff may remember it differently, but, in 1980, both parties ran a campaign that basically said, "we are in trouble, and to cure inflation, we are going to have some pain." Carter had his "malaise" speech, and Reagan was no breath of sunshine. I had a CD in those years that had an 18% rate, and you could peel off the price stickers on canned goods and actually see how they had increased in price. My recollection is that the public in general accepted that the medicine was going to be unpleasant.
...the shortage of solid investments led to an overreliance on financial engineering to create returns. And then the crisis. Capital kicked out a leg of its own stool. Short-termism brought on by a lack of oversight...
Hack, you really have something when you say that folks were relying on home equity as their store of capital. That produced the "wealth effect" and folks overspent. Very low-interest rates are a way of taking money from savers and giving it to spenders. That should be good for the economy.
If I were you young bucks, I'd be paying close attention to your 401(k)s and IRAs. Ultimately, correct economic theory has to result in predictions. The biggest pot of money I see out there is the tax-advantaged retirement plan. They are today what home equity was 10-20 years ago. And here the government already has a hook into them because they are "subsidized" by being tax-free.
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