Everywhere in the world for a good twenty years now, the real rate of return on economically-productive investments has tended to be well below its previous trendline. During that time, rates on the short-term debt of high-rated governments have tended to be in the range of one percent as opposed to the historical two or more percent.
That’s one point. Another one (famously dubbed “the conundrum” by Alan Greenspan) was the fact that the interest rate on the economically-meaningful 10-year Treasury note remained depressed even as the Fed increased interest rates during the middle years of the past decade, fueling the housing bubble among other things.
Broadly speaking, there’s no business model available for banks under such conditions. To survive, they need to increase the yields they earn, by dialing up risk, leverage, or the term structure of their asset portfolios. As it turns out, bankers did all of that, and even resorted to inventing phantom assets, like CDO-squareds, that weren’t even based on actual economic value….the underlying drivers are clear enough to see.
And they’re still in place today. Too much credit had been created in the hunt for yield. The developed countries in 2008 and 2009 faced the prospect of seeing that mountain of credit deflate, so they socialized it instead.
His last line sums up in a nutshell why protectionism appeals to the Left. Read the whole thing.