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

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