[quote=Jazzman]^^^That misses the point that CAR is making, but it was more than just interest rates and lax lending. The chronology might go something like this:
Recession and loss of manufacturing
Deregulation of financial markets
Creation of complex financial products
Dot.com bubble
Monetary easing
Collateralizing risk and risk transfer
Lax lending due to risk transfer
Lax regulatory scrutiny (due in part to misplaced loyalties)
Denial followed by collapse
Banks used to lend your money to borrowers. That risk was transferred to investors. Consumer driven economies enjoyed huge increases in lending and the apparent guarantees offered by risk transfer. What was not to like about it? Well, we are puny humans and give in easily to our irrational side.[/quote]
Exactly, Jazzman. The low interest rates caused investors of all stripes to move further out on the risk curve in order to reach certain return targets. This, along with financial instruments that appear to shift risk (thanks to deregulation), is what causes lax lending standards.
The lax lending standards are the effect, the low interest rates are the cause.
