Many good points. I believe Greenspan lowering to 1% gave rise to the ARM phenomena, the teaser rates were tied to short term rates. They only raised .25 at a time, so the time frame between 2003 through much of 2005 those ARMS were still really low. You mentioned the carry trade and i think that is what really caught the FED off guard. I remember especially in late 2004 and 2005 that the fed was raising and mortgage rates on 30 year mortgages (which are tied to the 10 yr note) were going down. Usually as the fed tightens the long bonds reflect that tightening. But thats not the case when Japan interest rates are zero and they are cranking out liquidity that is not sticking in Japan and is looking for some place to go like U S Treasuries and I’m sure it found its way into the “Wall Street” financing you pointed out. Basically they turned a money faucet on and it turned into an unstoppable fire hydrant and it found its way into the asset of the day….Real Estate. Now we are sitting here with property values sitting at 10 to 12 times incomes in bubble markets and loans that are coming due that people have no way of paying back. What a tangled web the Fed can weave.
Regarding destroying the dollar, that scares me to death and I don’t think it will work. If the dollar craters, then US Treasuries are less appealing and fall in value sending interest rates up higher. I can tell you one thing I wouldn’t want to be Bernanke right now.
