Stephen Williamson points us to a Kocherlakota paper on government guaranteed debt. His point is that subsidies overprice the scarce resources. In housing the scarce resource is land, so land prices rise with a mortgage subsidy.
The case is a bit more subtle, we make longer term investments in the scarce resources. The gain comes from owning the scarce thing for longer, the essentials of overcoming scarcity is to makes its presence visible for longer into the future. As the price differential accumulates, the desire to consolidate the long end and gain economies of scale become overwhelming.
So, I would think that keeping rates too low for too long causes a bubble to grow and move to the long end, until steepness demands a consolidation of gains. On July 15, 2008, OPEC wanted to consolidate their gains.
The hydraulic model predicts no crash, the balloon is elastic in both directions. Incomplete quantization really does not cause a crash, it just causes short volatility during requantization. There is one thing left, asymmetry, especially asymmetry when the economy has to requantize. It is hard to set up a special bankruptcy system for liquid dissolution of assets when the economy never plans for negative growth rates.
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