I think the big part of the story is that the investment accelerator is a big thing, even though our models say it should not. Businesses do wait to invest until they are running flat out to invest. It’s a puzzle why they do this–they ought to act like the foresighted agents in our models, shouldn’t they?
I think a large part of the rest of the story of depressed investment is the growth of radical uncertainty. We used to see one 40% real collapse in the value of an important asset class every generation.
Now we have seen three in a decade.
Call it radical uncertainty, call it the collapse of risk tolerance, call it moral hazard in the credit channel’s ability to do the risk transformation as nobody will believe that investment banks produce AAA assets rather than sell you unhedged puts–the failure to satisfactorily mobilize the collective risk bearing capacity of the world to support risky investment is one of the biggest financial stories of the past decade. You look at the bonds of exorbitant privilege possessing reserve currency sovereigns and at the U.S. equity yield hanging up there at 5% real, and we have an equity return premium of the magnitude of the immediate post-WWII years and not seen since.
For residential investment, of course, we have to add regulatory uncertainty. Would you sell thirty-year fixed-rate nominal callable loans when there was no plan for how the mortgage finance GSEs will operate in a decade?
Questions to which I do not have any good answers:
Why is it that capital is so very expensive for risky businesses and so cheap for the exorbitant privilege possessing reserve currency sovereigns? How much do we dare ask those sovereigns to take over the business of boosting investment globally via infrastructure for the next decade or so?