Greenspan’s “conundrum” a case of hot money flows and failure to respond

Here is a chart of the US Treasury debt yield curve on February 9, 2005(Wikipedia):

Note the flatness of the long end.

Time passed and the following article appeared in the financial press: Is the inverted yield curve cause for worry? – Jan. 2, 2006:

“”the yield on 10-year Treasuries temporarily fell below that of 2-year notes, a rare event because investors tend to demand higher yields on longer-dated bonds to compensate for the risk of higher inflation later. But the curve later reverted to its more normal status, with the 10-year yield at about 4.36 percent, above the 2-year note yield of 4.35, but just barely.”

It seems that the well documented foreign (Chinese) investment inflows into Treasuries that suppressed the long end of the curve at that time represented “hot money” flowing in; similar to the situation in Asia just prior to the 1997 crash there.  Perhaps the correct policy response by the Treasury and Federal Reserve should have been capital controls; recognizing that the distortions to the US economy from the hot money would be unproductive (think excess housing construction) and hot money flows out fast later (see Asian Financial Crisis).

The actual hot money outflows after the crash in 2008 were covered in part by the Federal Reserve purchasing much of the GSE MBS and Agency debt owned by China.


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