The Federal Reserve artificially suppressed interest rates from roughly 2008 to 2022. It did so by creating $8 trillion of credit out of thin air to buy Treasuries and mortgage-backed securities.
This pushed stock, bond, and real estate markets well beyond what the underlying economy could support. Falsified interest rates also birthed wild objects of speculation.
Speculative manias always gain momentum through the expansion of credit. A look back at past manias tells a familiar story.
For example, the mania for tulips in Holland in 1636 and 1637 was intensified by personal credit. At the peak, sellers had no bulbs. Yet buyers, lacking cash, made down payments with personal possessions.
John Law’s Mississippi Bubble from 1718 to 1720 was puffed up by paper notes issued by his Banque Générale, later the Banque Royale. The mania for residential real estate from 2003 to 2007, was made possible by low interest rates and the expansion of credit through mortgage-backed securities. Continue reading