How do Financial Bubbles Create Massive Deficits? (Congress, Obama, companies)

[knowledgeiskey]

How did Alan greenspan create the massive deficit when he lowered interest rates? I'm trying to find the correlation between lower interest rates and increased national deficits.

[Loveshiscountry]

Originally Posted by knowledgeiskey

How did Alan greenspan create the massive deficit when he lowered interest rates? I'm trying to find the correlation between lower interest rates and increased national deficits.

Lower than market interest rates encouraged mal investment in the housing market. (Don't give economic drunks the car keys.) That artificially drove housing prices up. Government stepped in after the crash and bailed out their buddies in business whose companies would have gone under.

[Cletus Awreetus-Awrightus]

Originally Posted by knowledgeiskey

How did Alan greenspan create the massive deficit when he lowered interest rates? I'm trying to find the correlation between lower interest rates and increased national deficits.

After we handed over the monetary system to the banks, then deregulated them, then lowered interest rates, they all started to print (loan) tons of money for loans.

The flood of consumer and mortgage market debt caused a private debt bubble. This bubble began to drive up commercial and residential real estate prices. This caused economic activity: homebuilders started building, RRE agents started selling, homeowners started taking HELOCs out.. people are buying $500k houses, Jaguars, and Jet skis.... government revenue is increasing, too, so governments spend more.

But, eventually this private bubble bursts once the consumer becomes saturated with debt and cannot take on any more new debt. That's where the Federal government gudget deficits really start to grow, to prevent a a full-fledged depression caused by a bursting credit bubble.

Bush and congress decided to recapitalize the financial system, and that put us in (public) debt.

Bush nationalized Fannie and Freddie and the mortgage markets, which increased the debt.

Then Obama took over, and within the next year the financial mess had hit "main street," and we started having massive layoffs due to a decline in demand for nearly everything. At this point , our "welfare state" is designed to automatically kick in, and spend much more whenever a depression hits. This last part added to the deficit as well.

Then you have specific policy stimulus, which added to the debt. I don't know WTF that actually did... mostly seemed to keep state/local government employees from getting fired, temporarily.

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Personally I think our short term choices are:
a. A bigger deficit
b. A depression (the sort with years of declining GDP.)