| Lets keep it civil. You suggested to “read history”. I responded with evidence that I have in fact read relevant history thoughtfully and arrived at a different conclusion. You provide no evidence that the factors I list matter less than monetary policy. I actually think the Greenspan Put (ie low interest rates to stimulate the economy) is a good example because many people, including, it seems, you, identify that as the most causal and important factor in creating the subprime crisis. This type of monetary policy is relatively new, yet asset bubbles have existed throughout history, even where there wasn’t even a unified currency let alone a Federal Reserve that set such policy. In fact, evidence suggests that it was driven by a new financial business model, securitization, where loans were no longer held by banks but placed into a special purpose companies with shares of that SPV sold to investors. Underwriting began to be meaningless as the companies originating loans wanted more volume because they got fees and held no risk. Investors were told that financial engineering meant these assets were AAA and safe. Also throw in the fact that investment banks that were doing the financial structuring were no longer general partnerships (where individual partners are personally liable for partnership debt) but for the first time limited liability companies or corporations, and you get a clear picture of psychological, and new business model innovation, driving the bubble. Similar story with the savings and loan crisis. Monetary policy is easy to blame until you look deeper. As in the financial crisis, you had financial innovation “Junk Bonds”, and regulation changes that let S&Ls take risks and deploy capital where they were previously restricted. All while monetary policy was tightened drastically, which should deflate asset bubbles not create them. Further it is a good counter example to the Greenspan Put because monetary policy was exactly the opposite of Greenspan; Volker was jacking up interest rates to kill inflation and yet Savings and Loans were taking crazy risky bets and created real estate and junk bond bubbles. If you’re theory is valid, it should have a prediction on what monetary policy would create. Simply saying “it is the most important factor” gives no information. What happens when monetary policy is tight and rates are high. What happens when it’s the opposite. Lastly, you seem to imply that someone controls monetary policy. The financial crisis made it clear that shadow banking, derivatives, and general flow of funds between banks was orders of magnitude bigger than any thing the Fed controlled. These monetary instruments were the real driver of the mortgage bubble, not any monetary stimulus through low interest rates. Is monetary policy important. Yes. Does it explain why Uber and Lyft and every other unicorn are getting investment easily. No. Does it predict or cause most bubbles. No. I am open to being convinced otherwise. |