Tue Apr 26th, 2011 at 02:34:17 PM EST
In the comment thread to my last diary, 'Bubbles' Greenspan came up. And while I despise Chairman Bubbles as much as the next guy, I think it's important to despise 'Bubbles' for the right reasons. To whit:
Greenspan took care of keeping interest rates low. This bred a series of asset bubbles, culminating in the real estate bubble which began deflating in 2007
Relaxation of lending standards and margin requirements make bubbles. Low interest rates have nothing to do with it. You get bubbles at 7 % rates. You get bubbles at 3 % rates. You get bubbles at 0 % rates. Hell, the broker's rate touched 12 % for a while during the spring of 1929. When you have that sort of short-term returns to speculative activity, fiddling with the rediscount rate barely amounts to a rounding error.
Yes, you can kill a debt bubble by jacking up interest rates, in the same way that you can kill inflation by jacking up interest rates: By killing your economy so dead that nobody has the confidence required for price increases or borrowing. That is the stupid way to do it.
The smart way to do it is by jacking up margin requirements, because that leaves interest rates unchanged for viable borrowers and sends them through the roof for Ponzi scams.
The "low interest rates lead to bubbles" narrative is a right-wing narrative. You do not want to push that. The reality-based narrative is "low margin requirements lead to bubbles."
Greenspan fueled the bubble by cheerleading on the bubble, by lobbying against all meaningful regulatory reform, by failing to police the Fed's member banks. He did not fuel the bubble by not killing the American economy completely dead in 2003, any more than convenience store clerks encourage robberies by not having capsules of sarin gas under the counter.