Why is no one discussing the cause of our economic problems explicitly? We refer to generic Republican policies, but do not point out the elephant in the room.
Does anyone doubt that the cause of the market turmoil today was the bubble in real estate? At the 2005 bubble peak, housing reached all time highs in terms of valuation. Real estate was as overvalued as stocks were in 2000 (see http://www.safehaven.com/...
How did real estate values get so high? Everyone who invests in stocks knows that increase rate cuts are bullish (that is they make prices go up). Early in this decade the Fed cut interest rates by over 400 basis points. Such an enormous reduction in interest rates would have to have a major stimulatory effect on the prices of assets like homes. And they did.
It was widely acknowledged at the time that interest rate cuts were causing rising real estate prices. How can anyone deny this?
This brings me to the inescapable conclusion that the interest rate cuts in the early 2000's helped create the real estate bubble and the problems we have now.
So, why did the interest rate get cut to such low values? The reason was that there had been a bubble in stocks that peaked in 2000. The interest rates cuts were made to prevent the stock bubble collapse from doing what policymakers are afraid the real estate bubble collapse might do.
So the cause of the interest rate decline was the stock market. And this decline was a major contributor to the real estate bubble--which is the cause of our problems.
Simply put, the stock market bubble was a major contributor to our current problems.
But why did a bubble develop on the stock market? This bubble was the biggest in American history by far (see http://www.amazon.com/... Already in December 1996 Fed Chairman had warned about "Irrational Exuberance". By mid-summer 1997, the market has advanced 20% and the valuation (P/E) had risen to levels above those at the peak before the 1987 crash.
Clearly, the stock market was overvalued in July 1997. At this time Congress passed a capital gains tax cut.
Now the intent of this investment tax cut was to stimulate investment--the sort of investment that produces capital gains. This is obvious.
Capital gains come from rising asset prices, so the intent of this tax cut was to stimulate asset price increases. At the time the cut was enacted, the asset of choice for investors was stocks, which had already done very well over 7 years since the previous bear market.
Clearly, the objective of the tax cut was in stimulate asset price rises in the stock market and other asset classes. And it worked. The market rose 70% after the cut was enacted.
Since the market was already overvalued when the tax cut was passed, any further rises would necessarily create a bubble.
This means that if the tax cut worked as intended it would create a bubble in stocks. It did work, the bubble was created.
Now shift to 2003. The stock bubble has collapsed. The Fed has slashed rates. Median home prices have already risen to more than 4 times median household income, higher than the 3.2 multiple they had reached in 1990, at the end of the previous real estate boom.
What does Congress do? They pass another capital gains tax cut, with the intent of stimulating further asset price rises. With stocks a toxic asset class, the asset of favor was real estate.
The fly in the ointment was that real estate in 2003 was already more overvalued that stocks had been in 1997, reflecting the stimulus of low interest rates and the already-low capital gains tax rates.
But cut the capital gains tax rate they did. Once again the only reason for doing this would have to be to stimulate asset price rises. And it worked. Already-overvalued housing prices rose to nearly five times median income. This was insane. But when you layer the stimulus of extremely low interest rates plus, not one, but two capital gains tax cuts, what other outcome would you expect?
Did policymakers expect folks would buy stocks, which were now attractively priced (see http://www.safehaven.com/... instead real estate, which was "safe" and going up? If they did they were idiots. Investors always buy the hot asset, it's human nature.
It is clear that our problems were created by "supply side" tax cuts that were made with the intention on increasing investment. They did exactly that--first with stock investments, and then with real estate investments.
Some may argue that the "real" intent of supply side tax cuts is to stimulate investment that creates jobs. It turns out, that type of investment is the only kind that is NOT stimulated by tax cuts (see http://www.safehaven.com/...
So the only conclusion is that this crisis was quite intentionally produced by supply-side tax cuts.
By "intentional" I mean the result (rising asset prices) was intended, not that policymakers wanted a credit market meltdown. That is, supply-siders are incredibly stupid and venal, but not traitorous.