In my perhaps parochial view, what is coming home to roost is the upshot of previous tax cuts that didn't, and couldn't, pay for themselves, virtually no financial regulation to speak of, fostering an "anything goes" environment, and a Fed that "eased" at the slightest dips over the years rather than allowing small and periodic corrections along the way to play themselves out. The Fed's actions over the past several years have been about as far-minded as putting out every single forest fire until there is so much accumulated deadwood that the inevitable blaze that will follow may be next to unstoppable. Meanwhile, the Fed is low on water.
Right, except some would say look back a good deal farther.
I agree with the view that says we are at the tail end of a 25 year leverage and debt supercycle, having kicked off in the early 80s as a result of Volcker "breaking the back of inflation."
After the extraordinary pain wrought on the U.S. economy by the Volcker fed to kill off inflation -- read Greider's excellent "Secrets of the Temple" for much more on this -- the country started on a long protracted "leveraging up" path beginning with the Reagan administration. (Dick Cheney: "Reagan taught us that deficits don't matter." Well, they do now, Dick.)
At the same time that the government started leveraging up in the 80s, the early underpinnings of the "shadow banking system" were created -- the means by which Wall Street took the reins of unconventional credit creation.
And then, of course, "the Maestro," Alan Greenspan, showed up just in time to be imprinted like a duck after successfully saving the country from the aftermath of the '87 crash. Greenspan learned precisely one lesson after that -- when ever anything goes wrong, PRINT -- and gave up his last vestiges of a spine when his "irrational exuberance" speech went over like a lead balloon in Washington, embracing his role as head cheerleader / soothsayer / money printer ever after. It was Greenie's insistence on taking interest rates down to 1% and leaving them there for over a year post dotcom / telecom crash that was a major driver for the larger and even more destructive housing bubble, which in turn fueled the China / Middle East treasury buying cycle via pumped up consumers loading up on "stuff" and sending their housing equity dollars abroad, which came back home to be parked in USTs and keep long rates low (and mortgage rates low) in a classic Soros style reflexive feedback loop.
Then, too, there is the multi-decade decline in consumer savings rates -- as fueled by a steady increase in leverage, natch -- traveling from somewhere in double digits (above 10%) in the early 80s all the way down, down, down to below zero for the first time (consumers spending more than a dollar for every dollar earned) in 2005.
So, yeah, the Fed of the last few years has really screwed the pooch, but basically Bernanke took the baton from Greenspan and the whole country has been doubling down on its borrow and spend bets, martingale style, for a couple decades now. That's why we're not in Kansas anymore... there is a major unwind and recalibration underway the likes of which few have ever seen.
