It is, none the less, generally true that very low interest rates for a long time and with an expectation that they will be low for a long time is an invitation to carry trades and to bubbles.

Carry trades, yes, but any CB/financial regulator with two brain cells to rub together can kill those. Bubbles, no. You get bubbles when you have high rates, you get bubbles when you have low rates. Because you get bubbles.

It so happens that the genesis of the bubbles of the last thirty years have coincided with low interest rates. This is because inflating a bigger bubble is the only solution neoliberal economics permits for dealing with the fall-out from a bursting bubble. So you will have low rates and incipient bubbles coinciding due to the common origin as remedies for an economic downturn.

You can destroy bubbles by raising interest rates, yes. Nobody disputes that. But the way raising interest rates kills bubbles is by keeping you at the bottom of the business cycle, whereas the way prudent financial regulation and unrestricted countercyclical fiscal policy prevents bubbles by keeping you on the top of the business cycle.

I know which of those I'd like to use.

Perhaps human nature in a lightly regulated low interest rate environment with run amok finance doesn't "cause" bubbles either, but there will be a high correlation of the creation of bubbles with such conditions.

Human nature in low regulation environments is to run amok with bubbles. Interest rates are neither here nor there. Interest rates were not low during the Florida land bubble. Interest rates were not low during the South Sea bubble. Interest rates were not low during the Tulip bubble.

- Jake

Friends come and go. Enemies accumulate.

Because neoclassical monetarism says that the only thing the central bank should or could worry about is inflation, that inflation is due to the growth of the money supply, and that the size of the money supply is controlled by setting the interest rate.

Economics is politics by other means

Otherwise it's just a government failing to apply sufficient countercyclical fiscal policy when the catch-up period ends, and the private sector has to take some time to figure out what to do with all the people it previously employed to work in the catch-up.

The affordability of mortgages has been damaged more by people losing jobs and large parts of their income rather than the relatively minor interest rate increases to date.

If people are not being bankrupted by rising interest rates, then how would higher interest rates in the past have prevented them from going bankrupt today?

If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Because the ECB believes that money supply drives inflation. (In the real world, it's the other way around.)

- Jake

Friends come and go. Enemies accumulate.

Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.

"Overall, the household sector seems to be in good shape," Greenspan said.

Housing market is a credit market, not "real economy." Credit is given to the one who promises banks the highest interest. The price rises until "investors" pay all rental value to the banks as interest. So again, lower interest just means higher prices.

But interest rates affect other things than the mortgage market. They also raise the risk-free rate of return, which means that they subsidise lazy money and reduce investment in real capital (if you can invest in a machine that gives 1 % or in a sovereign bond that gives 1 %, you're going to pick the bond. But the bond generates 0 % added value to society, while the machine generates 1 % added value to society - so that's a net loss).

- Jake

Friends come and go. Enemies accumulate.

It's not like I haven't done that stuff before.

(sigh)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

In the last 10 years, the price of tenant-owner apartments nationwide has risen by 153 percent [Me: eek!,] while small houses have grown in value by a comparatively modest 72 percent.  [Me: "modest" 72%????]

In 2000, buyers had to pay 8,314 kronor per square metre ($115 per square foot) for a flat in Sweden. But by the end of 2010, Swedish apartment prices had risen to 21,057 kronor per square metre ($293 per square foot).

(cite)

Looking at the price rise and comparing to the average Swedish salary I conclude Sweden (and Finland) is experiencing a real estate bubble.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre