THE CREDIT BUBBLE….Steven Pearlstein writes today about the subprime mortgage meltdown and the more general credit bubble that it was a part of:

The nature of credit bubbles is that the difference in interest rates paid by risky borrowers and safe borrowers narrows. Never in history were they as narrow as they were just a few weeks ago.

….A credit bubble develops when there’s too much money to lend and too few places to lend it. A world capital glut has been created by the impending retirement of the baby-boom generation and the globalization of finance, which has made the savings of billions of people in developing countries available for investment overseas.

But I wonder if there’s more to it? A tax code that supports free and easy capital formation is a good thing, but when does it become too much of a good thing? Middle class workers generally spend most of their earnings on consumption while the rich, who can’t spend it all, look for investment opportunities. So as income inequality spreads and the rich accumulate ever more money; as their top marginal tax rates go down; as capital gains taxes are reduced in order to spur investment; and as the Fed chairman actively supports dodgy loan practices — all of these things contribute to ever more cash looking for places to be invested. When there’s too much of this cash floating around, you get a credit bubble.

If the only people hurt by this were the rich who created the bubble in the first place, it probably wouldn’t be a big deal. But there’s a price to be paid by all of us for a bubble created partly by policies that favor investment and capital to the exclusion of almost everything else. Conservative economics run amok hurts everyone.

But you already knew that.