What happened here was not a problem caused by low rates. While there were bad actors taking out loans, their motivations are effectively irrelevant. What happened is that default risk was decoupled from the people who originated the loans. Once you decouple the risk, the 4Cs above become irrelevant at the point of loan origination.
I agree with your comments wrt to why the financial system is imploding (decoupling of loan quality from lenders), but low interest rates are still a prescription for asset inflation, which in itself can lead to problems. It is a matter of attribution, which I keep commenting on, is very difficult to achieve (with any meaningful consensus) in economics. If you drive down interest rates low enough, you can still drive up speculation even with a reduced pool of investors based on tighter credit standards. This will result in asset inflation just as effectively as having a larger pool of investors with lower credit standards at a higher interest rate.
Either way, the bubble will burst at some point, unless you very carefully unwind it via some outside regulator mechanism. When the bubble does burst, and if assets deflate significantly, you will still have people walking away from underwater deals, quite independently of their credit standards.
So, as I noted early on, the problem was indeed low interest rates coupled with "innovative mortgage" methods which quite predictably lead to a RE bubble. Unfortunately, our FED somewhat has a policy of not intervening in bubble bursting. Why this is so is beyond me. It seems to be based on some ideological nonsense that markets are the only way to price things, so the FED can never say there is a bubble until after it implodes, at which point the FED views it as their duty to intervene and help clean up the mess. Very strange if you ask me. |
