This comes from today's Wall Street Journal (page A1 in the print version, subscription required for the online version):
Strong demand for mortgage-backed securities from investors world-wide is allowing American lenders to make more loans -- and riskier ones -- in a way that is helping prolong the boom in U.S. house prices.
The cash pouring in -- not only from U.S. investors but increasingly from Europe and Asia -- keeps stoking the housing market even as the Federal Reserve Board continues to raise interest rates, normally something that damps home prices. The market has shown a few signs of slowing recently, and talk of a bubble has grown louder, but prices continue to rise or remain at lofty levels as investors continue to gobble up mortgage-backed securities and banks keep lending.
This is but a variation on a theme I have emphasized in the past: The "interest rate conundrum", the resulting stimulus to consumer demand, and the stubborn refusal of the U.S. current account to reverse course are all a piece of developments that are fundamentally driven by the desire of foreigners to send their financial capital to the United States.
A few comments about alternative opinions on the low-interest-rate/trade-deficit/consumption-binge troika. Several of my fellow bloggers -- Brad DeLong, pgl, William Polley, and Mark Thoma -- commented on an article appearing a few weeks back in The Economist, sugggesting that an explanation that hinging on excess creation of liquidity. Several of these commentators were skeptical about The Economist's position. Count me in on that. Although this will seem hopelessly old-fashioned, here is the recent record on money creation in the United States:
Broad money growth in the 4-6 percent range with nominal GDP growing at a 5-6 percent annual rate just doesn't spell excess liquidity to me.
In previous posts, James Hamilton has taken me to task for downplaying the trend in U.S. personal saving rates. On this, let me just say that I think the differences between Professor Hamilton and me are not that large. I agree that saving rates would be low even without the willingness of foreigners to finance American consumption. My only point is that global influences have accentuated this tendency, and are impeding some of the adjustments that most of us think are inevitable.
Finally, pgl continues to assert that the total picture cannot be understood without gettting to the bottom of what he calls the "investment bust." On this, my friend and I are on exactly the same page.
UPDATE: Tim Duy and I are on the same page as well.
ANOTHER UPDATE: The Big Picture covers this story too.