Saturday, March 17, 2007
Overheated House Prices are merely one symptom of a larger malaise: irresponsible monetarism
This practice of borrowing short-term at low interest rates to lend long-term at higher interest rates, known as "carry trade" in bank parlance, when globalized by deregulated cross-border flow of funds eventually led to the Asian financial crisis of 1997, when interest-rate and exchange-rate volatility became the new paradigm. Today, there are undeniable signs that the same interest-rate risks have infested the US housing bubble in recent years. And the Fed's traditional gradualism, now revived as "measured pace" in raising the Fed Funds Rate targets in response to rapid asset-price inflation, has had little effect in curbing bank lending to fund rampant speculation.