Bankers may be the villains of the credit crisis, but what about the borrowers? The credit bubble was the latter day means of financing the switch from thrift to leverage by US individuals. US citizens abandoned the idea of building the American dream on hard work and savings and instead used the cement of debt.

It all started when Paul Volker took over as Fed Chairman in August 1979 and set the example of pursuing an inflation-busting monetary policy. This gave us the twin decades of disinflation. Disinflation was a great good, allowing the world economy to grow faster, more productively and more continuously, without much in the way of cyclical ups and downs. Of course, many other factors contributed, but in the end, it was sound monetary policy that provided the stable backdrop of constantly falling inflation.

As inflation falls, the value of future income streams will increase. Tomorrow's money gets to be worth more today than when more inflation eroded its value. This pushes up asset prices whose value is an accumulation of tomorrow's profits and income (adjus- ted for inflation and the time cost of money). At the same time, disinflation makes it cheaper to borrow in both real and nominal terms.