By flooding the market with cheap credit, Alan Greenspan pushed interest rates (including mortgage rates) down to artificially low levels. This caused the bubble in house prices and misallocated too many real resources to the housing sector.
If policymakers finally let a real economic "correction" and recession happen, it means the economy will finally turn toward doing what the consumers actually want.
The “forgotten depression” can still teach us important lessons: that the interventionist and spendthrift state is often more part of the problem than it is of the solution.
Eventually, loose monetary policy will damage real savings to the point that the economy can no longer sustain sufficient economic growth. At that point, it will become clear that money printing can't create economic growth.
Liquidity only disguises risk; it does not resolve solvency issues driven by collapsing cash flows while costs remain elevated.
Despite double-digit unemployment rates, banks are keeping loan-loss provisions low, no doubt assuming Uncle Sam will keep everyone’s boat afloat. But all good things come to an end.
The mother of all monetary stimuli could turn out to be worse than a dud—a catalyst to a slide into further recession just as the supply shock of pandemic recedes.
Just how is this magic created? The spurring of demand in the midst of a covid-created depression. The wizards at the Fed and Treasury have created an intoxicating frothy brew for stock and home buyers alike.
If we can spend a few trillion overnight to bail out investors and send out 150 million stimulus checks, why not also launch a universal basic income and a slavery reparations program?
Europe's path to long-term stagnation should serve as a reminder for the United States, again, of why it is not advisable to follow the eurozone policies. The results are invariably disastrous.
