The failure to halt the emergence and growth of the debt bubble

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Chapter 18 in All Fall Down, 2018, pp 127-131 from Edward Elgar Publishing

Abstract: The Federal Reserve’s adherence to free market ideology contributed to its failure to recognize that changes in the structure of financial markets and the role of banks had weakened its ability to implement countercyclical monetary policy. Allowing reserve requirements to wither as a policy tool, it lost influence over the supply of credit and its reliance on interest rates to influence demand became increasingly counterproductive as rising rates increased capital inflows and falling rates triggered outflows. The loss of influence over the supply of credit resulted in a rise in the total debt of all US borrowers from $5 trillion in 1982 to $25 trillion at the end of the 1990s. But the debt bubble continued to grow and reached 352.6 percent of GDP at the end of 2007 — a clear signal that the economy could no longer generate sufficient income to service debt.

Keywords: Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2018
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