The money is coming from the global liquidity glut: central banks printing money, and needing a place to invest it. China prints yuan to buy the dollars we send for all their exports, so the manufacturers can trade in the dollars they get for yuan, and the renminbi doesn’t appreciate. Those dollars come back to the US to buy MBS (mortgage backed securities), treasury notes, stocks. Some money came from the Japanese yen carry trade, which is unwinding in the 3 months ending June 30, 2006.

I think the real problem is the low risk premium that these investors require. With so much money chasing so few opportunities, people were not requiring to be paid for taking risk. The bought MBS that were of low quality, for little return.

I made a mistake in writing that the 1% Fed Reserve rate was to blame. That certainly started it. But the global liquidity glut, and the American consumer buying more than they produce, caused it to continue.