Interview with Economist Kenneth Rogoff

"It's Complete Nonsense"

U.S. economist Kenneth Rogoff, 66, believes the European Central Bank should lower interest rates further if it becomes necessary, but argues that private savers should be protected from negative rates.

Interview Conducted by Michael Sauga

Economist Kenneth Rogoff
Economist Kenneth Rogoff

DER SPIEGEL: Professor Rogoff, the European Central Bank's Governing Council has kept its key interest rate at a low level for quite some time now. How long is it going to take before saving money is once again worthwhile?

Rogoff: Indeed, the ECB policy rate is at a record low, but this is a global phenomenon. My guess is that we will see a rise of 1 or 2 percent in the global real (inflation adjusted) interest rate over the next five years. But that's not what the markets are expecting. They are predicting that rates will stay low forever.

DER SPIEGEL: Many Germans won't be happy about this. They lament what they see as an "exploitation of savers" and claim the ECB is plundering the accounts of ordinary citizens. Do they have a point?

Rogoff: Absolutely not. I know that a lot of people believe that central banks are the culprits, but it's complete nonsense. If monetary policy were the main driver behind today's ultra-low inflation-adjusted interest rates, we would be seeing upward pressure on inflation. Instead we see inflation consistently below target. So, other reasons have to be responsible.

DER SPIEGEL: Many people argue that long-term demographic and technological trends are the main reasons for the low interest rates. Do you agree?

Rogoff: We don't fully understand the reasons for the low rates. I see three factors which are important yet underrated by most analysts. The first factor is that inflation has become very low and stable, making bonds a much more desirable and stable asset. Second, bond markets are very sensitive to fears of disaster of any type, like cyberwar, climate catastrophes or Donald Trump. There is no question that people today are more nervous than they used to be. The third factor is emerging markets. Their desperate need for safe assets is causing them to invest heavily in rich countries' bonds. Whereas all these trends help explain ultra-low rates to a certain degree, it remains quite surprising just how far interest rates have fallen. The ECB's decisions to lower their key rates are the consequence, not the cause of the low interest rates.

DER SPIEGEL: Late last year, the ECB lowered its deposit rate to a record low -0.5 percent and restarted bond purchases. Do you think these measures were appropriate?

Rogoff: The ECB carries a huge burden because it is not only performing monetary policy but also has to replace the missing eurozone-wide fiscal policy, to some degree. In buying the bonds of member countries, the ECB is effectively creating a kind of Eurobond, in which stronger governments support some of the debt of weaker governments. I think that's fine, but the monetary effect is very limited. For stimulating the economy, it's a very weak tool.

DER SPIEGEL: Some economists think the ECB's current policies do more harm than good, especially for banks hurt by the low rates.

Rogoff: I disagree. In reality, the ECB's negative interest rate policy right now is not doing much good or harm. Contrary to what the bank lobbyists are saying, the banks are now able to pass the low rates onto their bigger customers. Furthermore, they are profiting from the lower rates when borrowing on wholesale markets, through higher values of their assets and an upswing in their credit business. Virtually every recent study has found that for most banks, profits have not been hit that severely.

DER SPIEGEL: Some economists are warning that low rates are causing asset bubbles in housing and equity markets. Are these fears reasonable? 

Rogoff: What I am more worried about are risks piling up if interest rates suddenly rise. That would cause a lot of problems in many pockets of the global economy. For example, some emerging markets are overextended, and even in richer countries, a number of sectors will have problems if interest rates rise.

Let's not forget: We have been in an era in which interest rates keep falling and markets are beginning to count on "lower forever." Anything that reverses the trend fall in interest rates will be a rude shock and a big risk for the world economy. A significant upward shift in global interest rates, whatever the cause, would almost certainly cause a global recession.

DER SPIEGEL: New ECB President Christine Lagarde has announced a reassessment of the ECB's policy. What would you recommend?

Rogoff: In a world of low inflation and low real interest rates, central banks have to find an effective approach to bringing their key rates deeper into negative territory. If long-term real rates remain as low as they have been of late, finding ways to make negative interest rate policy more effective is the only way forward for monetary policy.

In a deep recession, negative real interest rates can encourage investments and help restart the economy. Negative rates are really a consequence of low and stable inflation. If inflation was high, they would not be needed. But inflation is low, so you have to drive down your key rate into negative territory to get the required level of negative real interest rates.

DER SPIEGEL: But that would hurt savers even more.

Rogoff: Not when you adjust your regulations properly to the reality of negative rates. Banks need a way to insulate small depositors from negative rates and should to be subsidized for doing this. It is not necessary to pass on negative rates to 99 percent of ordinary people or businesses for the policy to be effective.

You have to pass them to the big players: the pensions funds, insurance companies, financial firms. Furthermore, central banks have to work together with their governments to adjust the banking and taxation rules, many of which were designed without negative rates in mind.

DER SPIEGEL: Is such a scenario realistic?

Rogoff: Well, many central bankers are thinking about negative rates. They are doing it loudly because they don't want to scare markets. But everyone recognizes that next time there is a catastrophic recession or systemic financial crisis, central banks will need to find more effective tools than they now have.

DER SPIEGEL: That would be a fairly massive experiment with unknown results.

Rogoff: Not so much as many people think. A recent IMF study showed that in advanced economies, real interest rates were negative about half the time over the last 200 years. Negative real rates (Eds. Note: the interest rate minus expected inflation) are hardly an unusual anomaly. But historically, inflation was much higher. The need for negative nominal interest is the flip side of the fact that inflation is very low. If prices were rising at 10 percent, I promise you interest rates would not be negative.

DER SPIEGEL: How could the ECB make the idea of negative interest rates more popular, especially in countries like Germany with cultures of saving?

Rogoff: In a crisis, the ECB should not bet running a popularity contest. In general, its job is to stabilize inflation, to prevent a financial crisis and to promote growth across the eurozone. It would be a big mistake if the ECB, or any central bank, were to reject the idea of negative rates. And it will happen. Look to the history of currency policy. No one was talking about flexible exchange rates when Milton Friedman started writing about it in the early '50s.

Floating exchange rates were not popular back then either. People thought they would bring down the financial system. They didn't. Instead, floating exchange rates solved a lot of problems. I think it would be much the same with the transition to allowing for negative interest rates in a deep recession.

Rogoff: Indeed, otherwise there is not much the ECB can do. If you look at the ECB's language, they now label the interest rate as their primary monetary tool and the bond buying program as a supportive, secondary tool. That is an important nuance and a first step into the right direction.

DER SPIEGEL: Some economists are favoring other measures, for instance direct transfers of money to households -- so-called "helicopter money." What do you think of this idea?

Rogoff: Central bankers are unelected officials. They have powers during extreme emergencies, but they do not have the democratic accountability to make decisions like that. Which households should get what amount of money? Allocative decisions like this need to be made by fiscal authorities, by elected government officials.

Another mistake would be to force the ECB to monetize government deficits, as some left-leaning economists and politicians are advocating. If European governments want to spend more money, great. But it is not for the unelected ECB to decide.

DER SPIEGEL: Some economists argue that in a world of low interest rates, it's not monetary, but fiscal policy that should act. In other words, governments -- not central bankers. Are they right?

Rogoff: There is certainly room for more fiscal policy in the eurozone, especially in surplus countries like Germany. But I don't think fiscal policy can ever be a substitute for monetary policy.


Rogoff: Fiscal policy has an important role to play, but it is much too political for the kind of fine-tuned, carefully balanced surgical decisions that are possible with monetary policy. Look in my country where there is a civil war about every fiscal decision: How can they possibly agree consistently on how to manage spending, taxes and transfers for balancing the ups and downs of the business cycle?

Maybe there will be a truce if there is a crisis, or maybe political divides will get worse. From this side of the Atlantic, it seems like your political battles are not as crazy as what's going on over here. Still, in Europe you have to get cooperation and coordination from all of the eurozone governments. There is no Europe-wide fiscal authority. There is no reliable alternative to monetary policy in times of deep recession or severe crises.

DER SPIEGEL: Is the eurozone well enough equipped for such events?

Rogoff: Perhaps, but the eurozone remains quite fragile. Let's suppose there is a sharp decline in China. This would be a catastrophe for Europe, which is quite dependent on exports to China, especially Germany. There would likely be a global recession, putting tremendous pressure on weaker members of the eurozone.

DER SPIEGEL: Political leaders in Europe are saying they will take radical steps once it's necessary.

Rogoff: Maybe it's too late then. The core problem is not that monetary policy is running out of steam, the core problem is that the political will to make the euro work is running out of steam. If you don't fix this, there indeed is not much that monetary policy could do.

DER SPIEGEL: What has to happen?

Rogoff: Again, the first thing is making the needed changes for negative interest rate policy to function. Second, there has to be greater fiscal and political union, otherwise the eurozone is very difficult to manage, particularly when severe and outside-the-box crises hit.

Greater political union will likely imply more transfers form richer to poorer countries. I know, this will be difficult news for Germans to swallow, but the eurozone is just not sufficiently stable in the current situation.

DER SPIEGEL: Could the euro stand another financial crisis like the one in 2008?

Rogoff: Maybe, maybe not. The eurozone survived after 2008, but just barely.

The banking sector is still quite weak, euro-wide political institutions are grossly underdeveloped.

I don't believe the euro is sustainable over the next 50 years without greater cohesion. True, if there is a severe crisis tomorrow, the European leaders would probably find a way. But there is a risk, maybe a 30 percent chance, they wouldn't.

The Neocons Strike Back

How a discredited foreign policy ideology continues to wreak havoc in Washington and around the world

By Jacob Heilbrunn

Illustration by Ryan Olbrysh

There was a time not so long ago, before President Donald Trump’s surprise decision early this year to liquidate the Iranian commander Qassem Soleimani, when it appeared that America’s neoconservatives were floundering. The president was itching to withdraw U.S. forces from Afghanistan. He was staging exuberant photo-ops with a beaming Kim Jong Un. He was reportedly willing to hold talks with the president of Iran, while clearly preferring trade wars to hot ones.

Indeed, this past summer, Trump’s anti-interventionist supporters in the conservative media were riding high. When he refrained from attacking Iran in June after it shot down an American drone, Fox News host Tucker Carlson declared, “Donald Trump was elected president precisely to keep us out of disaster like war with Iran.”

Carlson went on to condemn the hawks in Trump’s Cabinet and their allies, who he claimed were egging the president on—familiar names to anyone who has followed the decades-long neoconservative project of aggressively using military force to topple unfriendly regimes and project American power over the globe. “So how did we get so close to starting [a war]?” he asked. “One of [the hawks’] key allies is the national security adviser of the United States. John Bolton is an old friend of Bill Kristol’s. Together they helped plan the Iraq War.”

By the time Trump met with Kim in late June, becoming the first sitting president to set foot on North Korean soil, Bolton was on the outs. Carlson was on the president’s North Korean junket, while Trump’s national security adviser was in Mongolia. “John Bolton is absolutely a hawk,” Trump told NBC in June. “If it was up to him, he’d take on the whole world at one time, OK?” In September, Bolton was fired.

The standard-bearer of the Republican Party had made clear his distaste for the neocons’ belligerent approach to global affairs, much to the neocons’ own entitled chagrin. As recently as December, Bolton, now outside the tent pissing in, was hammering Trump for “bluffing” through an announcement that the administration wanted North Korea to dismantle its nuclear weapons program. “The idea that we are somehow exerting maximum pressure on North Korea is just unfortunately not true,” Bolton told Axios.

Then Trump ordered the drone strike on Soleimani, drastically escalating a simmering conflict between Iran and the United States. All of a sudden the roles were reversed, with Bolton praising the president and asserting that Soleimani’s death was “the first step to regime change in Tehran.” A chorus of neocons rushed to second his praise: Reuel Marc Gerecht, a former CIA officer and prominent Never Trumper, lauded Trump’s intestinal fortitude, while Representative Liz Cheney hailed Trump’s “decisive action.” It was Carlson who was left sputtering about the forever wars. “Washington has wanted war with Iran for decades,” Carlson said. “They still want it now. Let’s hope they haven’t finally gotten it.”

Neoconservatism as a foreign policy ideology has been badly discredited over the last two decades, thanks to the debacles in Iraq and Afghanistan. But in the blinding flash of one drone strike, neoconservatism was easily able to reinsert itself in the national conversation. It now appears that Trump intends to make Soleimani’s killing—which has nearly drawn the U.S. into yet another conflict in the Middle East and, in typical neoconservative fashion, ended up backfiring and undercutting American goals in the region—a central part of his 2020 reelection bid.

The anti-interventionist right is freaking out. Writing in American Greatness, Matthew Boose declared, “[T]he Trump movement, which was generated out of opposition to the foreign policy blob and its endless wars, was revealed this week to have been co-opted to a great extent by neoconservatives seeking regime change.” James Antle, the editor of The American Conservative, a publication founded in 2002 to oppose the Iraq War, asked, “Did Trump betray the anti-war right?”

Their concerns are not unmerited. The neocons are starting to realize that Trump’s presidency, at least when it comes to foreign policy, is no less vulnerable to hijacking than those of previous Republican presidents, including the administrations of Ronald Reagan and George W. Bush. The leading hawks inside and outside the administration shaping its approach to Iran include Robert O’Brien, Bolton’s disciple and successor as national security adviser; Secretary of State Mike Pompeo; Special Representative for Iran Brian Hook; Mark Dubowitz, the CEO of the Foundation for Defense of Democracies; David Wurmser, a former adviser to Bolton; and Senators Lindsey Graham and Tom Cotton. Perhaps no one better exemplifies the neocon ethos better than Cotton, a Kristol protégé who soaked up the teachings of the political philosopher Leo Strauss while studying at Harvard.

Others who have been baying for conflict with Iran include Rudy Giuliani, the former New York City mayor who is now Trump’s personal lawyer and partner in Ukrainian crime. In June 2018, Giuliani went to Paris to address the National Council of Resistance of Iran, whose parent organization is the Iranian opposition group Mujahedin-e-Khalq, or MeK. Giuliani, who has been on the payroll of the MeK for years, demanded—what else?—regime change.

The fresh charge into battle of what Sidney Blumenthal once aptly referred to as an ideological light brigade brings to mind Hobbes’s observation in Leviathan: “All men that are ambitious of military command are inclined to continue the causes of war; and to stir up trouble and sedition; for there is no honour military but by war; nor any such hope to mend an ill game, as by causing a new shuffle.” The neocons, it appears, have caused a new shuffle.

Donald Trump has not dragged us into war with Iran (yet). But the killing of Soleimani revealed that the neocon military-intellectual complex is very much still intact, with the ability to spring back to life from a state of suspended animation in an instant. Its hawkish tendencies remain widely prevalent not only in the Republican Party but also in the media, the think-tank universe, and in the liberal-hawk precincts of the Democratic Party. Meanwhile, the influence and reach of the anti-war right remains nascent; even if this contingent has popular support, it doesn’t enjoy much backing in Washington beyond the mood swings of the mercurial occupant of the Oval Office.

But there was a time when the neoconservative coalition was not so entrenched—and what has turned out to be its provisional state of exile lends some critical insight into how it managed to hang around respectable policymaking circles in recent years, and how it may continue to shape American foreign policy for the foreseeable future.

When the neoconservatives came on the scene in the late 1960s, the Republican old guard viewed them as interlopers. The neocons, former Trotskyists turned liberals who broke with the Democratic Party over its perceived weakness on the Cold War, stormed the citadel of Republican ideology by emphasizing the relationship between ideas and political reality. Irving Kristol, one of the original neoconservatives, mused in 1985 that “what communists call the theoretical organs always end up through a filtering process influencing a lot of people who don’t even know they’re being influenced.… In the end, ideas rule the world because even interests are defined by ideas.”

At pivotal moments in modern American foreign policy, the neocons supplied the patina of intellectual legitimacy for policies that might once have seemed outré. Jeane Kirkpatrick’s seminal 1979 essay in Commentary, “Dictatorships and Double Standards,” essentially set forth the lineaments of the Reagan doctrine. She assailed Jimmy Carter for attacking friendly authoritarian leaders such as the shah of Iran and Nicaragua’s Anastasio Somoza.

She contended that authoritarian regimes might molt into democracies, while totalitarian regimes would remain impregnable to outside influence, American or otherwise. Ronald Reagan read the essay and liked it. He named Kirkpatrick his ambassador to the United Nations, where she became the most influential neocon of the era for her denunciations of Arab regimes and defenses of Israel. Her tenure was also defined by the notion that it was perfectly acceptable for America to cozy up to noxious regimes, from apartheid South Africa to the shah’s Iran, as part of the greater mission to oppose the red menace.

There was always tension between Reagan’s affinity for authoritarian regimes and his hard-line opposition to Communist ones. His sunny persona never quite gelled with Kirkpatrick’s more gelid view that communism was an immutable force, and in 1982, in a major speech to the British Parliament at Westminster emphasizing the power of democracy and free speech, he declared his intent to end the Cold War on American terms.

As Reagan’s second term progressed and democracy and free speech actually took hold in the waning days of the Soviet Union, many hawks declared that it was all a sham. Indeed, not a few neocons were livid, claiming that Reagan was appeasing the Soviet Union. But after the USSR collapsed, they retroactively blessed him as the anti-Communist warrior par excellence and the model for the future. The right was now a font of happy talk about the dawn of a new age of liberty based on free-market economics and American firepower.

The fall of communism, in other words, set the stage for a new neoconservative paradigm. Francis Fukuyama’s The End of History appeared a decade after Kirkpatrick’s essay in Commentary and just before the Berlin Wall was breached on November 9, 1989. Here was a sharp break with the saturnine, realpolitik approach that Kirkpatrick had championed.

Irving Kristol regarded it as hopelessly utopian—“I don’t believe a word of it,” he wrote in a response to Fukuyama. But a younger generation of neocons, led by Irving’s son, Bill Kristol, and Robert Kagan, embraced it. Fukuyama argued that Western, liberal democracy, far from being menaced, was now the destination point of the train of world history. With communism vanquished, the neocons, bearing the good word from Fukuyama, formulated a new goal: democracy promotion, by force if necessary, as a way to hasten history and secure the global order with the U.S. at its head.

The first Gulf War in 1991, precipitated by Saddam Hussein’s invasion of Kuwait, tested the neocons’ resolve and led to a break in the GOP—one that would presage the rise of Donald Trump. For decades, Patrick Buchanan had been regularly inveighing against what he came to call the neocon “amen corner” in and around the Washington centers of power, including A.M. Rosenthal and Charles Krauthammer, both of whom endorsed the ’91 Gulf War.

The neocons were frustrated by the measured approach taken by George H.W. Bush. He refused to crow about the fall of the Berlin Wall and kicked the Iraqis out of Kuwait but declined to invade Iraq and “finish the job,” as his hawkish critics would later put it. Buchanan then ran for the presidency in 1992 on an America First platform, reviving a paleoconservative tradition that would partly inform Trump’s dark horse run in 2016.

But it was the neoconservatives, not the paleocons, who amassed influence in the 1990s and took over the GOP’s foreign policy wing. Veteran neocons like Michael Ledeen were joined by a younger generation of journalists and policymakers that included Robert Kagan, Bill Kristol (who founded The Weekly Standard in 1994), Paul Wolfowitz, and Douglas J. Feith.

The neocons consistently pushed for a hard line against Iraq and Iran. In his 1996 book, Freedom Betrayed, for example, Ledeen, an expert on Italian fascism, declared that the right, rather than the left, should adhere to the revolutionary tradition of toppling dictatorships. In his 2002 book, The War Against the Terror Masters, Ledeen stated, “Creative destruction is our middle name.… We tear down the old order every day.”

We all know the painful consequences of the neocons’ obsession with creative destruction. In his second inaugural address, three and a half years after 9/11, George W. Bush cemented neoconservative ideology into presidential doctrine: “It is the policy of the United States to seek and support the growth of democratic movements and institutions in every nation and culture, with the ultimate goal of ending tyranny in our world.” The neocons’ hubris had already turned into nemesis in Iraq, paving the way for an anti-war candidate in Barack Obama.

But it was Trump—by virtue of running as a Republican—who appeared to sound neoconservatism’s death knell. He announced his Buchananesque policy of “America First” in a speech at Washington’s Mayflower Hotel in 2016, signaling that he would not adhere to the long-standing Reaganite principles that had animated the party establishment. The pooh-bahs of the GOP openly declared their disdain and revulsion for Trump, leading directly to the rise of the Never Trump movement, which was dominated by neocons.

The Never Trumpers ended up functioning as an informal blacklist for Trump once he became president. Elliott Abrams, for example, who was being touted for deputy secretary of state in February 2017, was rejected when Steve Bannon alerted Trump to his earlier heresies (though he later reemerged, in January 2019, as Trump’s special envoy to Venezuela, where he has pushed for regime change). Not a few other members of the Republican foreign policy establishment suffered similar fates.

Kristol’s The Weekly Standard, which had held the neoconservative line through the Bush years and beyond, folded in 2018. Even the office building that used to house the American Enterprise Institute and the Standard, on the corner of 17th and M streets in Washington, has been torn down, leaving an empty, boarded-up site whose symbolism speaks for itself.
Still, a number of neocons, including David Frum, Max Boot, Anne Applebaum, Jennifer Rubin, and Kristol himself, have continued to condemn Trump vociferously for his thuggish instincts at home and abroad. They are not seeking high-profile government careers in the Trump administration and so have been able to reinvent themselves as domestic regime-change advocates, something they have done quite skillfully. In fact, their writings are more pungent now that they have been liberated from the costive confines of the movement.

But other neocons—the ones who want to wield positions of influence and might—have, more often than not, been able to hold their noses. Stephen Wertheim, writing in The New York Review of Books, has perceptively dubbed this faction the anti-globalist neocons. Led by John Bolton, they believe Trump performed a godsend by elevating the term globalism “from a marginal slur to the central foil of American foreign policy and Republican politics,” Wertheim argued. The U.S. need not bother with pesky multilateral institutions or international agreements or the entire postwar order, for that matter—it’s now America’s way or the highway.

And so, urged on by Mike Pompeo, a staunch evangelical Christian, and Iraq War–era figures like David Wurmser, Trump is apparently prepared to target Iran for destruction. In a tweet, he dismissed his national security adviser, the Bolton protégé Robert O’Brien, for declaring that the strike against Soleimani would force Iran to negotiate: “Actually, I couldn’t care less if they negotiate,” he said. “Will be totally up to them but, no nuclear weapons and ‘don’t kill your protesters.’”

Neocons have been quick to recognize the new, more belligerent Trump—and the potential maneuvering room he’s now created for their movement. Jonathan S. Tobin, a former editor at Commentary and a contributor to National Review, rejoiced in Haaretz that “the neo-isolationist wing of the GOP, for which Carlson is a spokesperson, is losing the struggle for control of Trump’s foreign policy.” Tobin, however, added an important caveat: “When it comes to Iran, Trump needs no prodding from the likes of Bolton to act like a neoconservative. Just as important, the entire notion of anyone—be it Carlson, former White House senior advisor Steve Bannon, or any cabinet official like Secretary of State Mike Pompeo—being able to control Trump is a myth.”

In other words, whether the neocons themselves are occupying top positions in the Trump administration is almost irrelevant. The ideology itself has reemerged to a degree that even Trump himself seems hard pressed to resist it—if he even wants to.

How were the neocons able to influence another Republican presidency, one that was ostensibly dedicated to curbing their sway?

One reason is institutional. The Foundation for Defense of Democracies, Hudson Institute, and AEI have all been sounding the tocsin about Iran for decades. Once upon a time, the neocons were outliers. Now they’re the new establishment, exerting a kind of gravitational pull on debate, pulling politicians and a variety of news organizations into their orbit.

The Hudson Institute, for example, recently held an event with former Iranian Crown Prince Reza Pahlavi, who exhorted Iran’s Revolutionary Guard to “peel away” from the mullahs and endorsed the Trump administration’s maximum pressure campaign. The event was hosted by Michael Doran, a former senior director on George W. Bush’s National Security Council and a senior fellow at the institute, who wrote in The New York Times on January 3, “The United States has no choice, if it seeks to stay in the Middle East, but to check Iran’s military power on the ground.”

Then there’s Jamie M. Fly, a former staffer to Senator Marco Rubio who was appointed this past August to head Radio Free Europe/Radio Liberty; he previously co-authored an essay in Foreign Affairs contending that it isn’t enough to bomb Iranian nuclear facilities: “If the United States seriously considers military action, it would be better to plan an operation that not only strikes the nuclear program but aims to destabilize the regime, potentially resolving the Iranian nuclear crisis once and for all.”

Meanwhile, Wolfowitz, also writing in the Times, has popped up to warn Trump against trying to leave Syria: “To paraphrase Trotsky’s aphorism about war, you may not be interested in the Middle East, but the Middle East is interested in you.” With the “both-sides” ethos that prevails in the mainstream media, neocon ideas are just as good as any others for National Public Radio or The Washington Post, whose editorial page, incidentally, championed the Iraq War and has been imbued with a neocon, or at least liberal-hawk, tinge ever since Fred Hiatt took it over in 2000.

But there are plenty of institutions in Washington, and neoconservatism’s seemingly inescapable influence cannot be chalked up to the swamp alone. Some etiolated form of what might be called Ledeenism lingered on before taking on new life at the outset of the Trump administration.

Trump’s overt animus toward Muslims, for example, meant that figures such as Frank Gaffney, who opposed arms-control treaties with Moscow as a member of the Reagan administration and resigned in protest of the 1987 Intermediate-Range Nuclear Forces Treaty, achieved a new prominence. During the Obama administration, Gaffney, the head of the Center for Security Policy, claimed that the Muslim Brotherhood had infiltrated the White House and National Security Agency.

Above all, Trump hired Michael Flynn as his first national security adviser. Flynn was the co-author with Ledeen of a creepy tract called Field of Fight, in which they demanded a crusade against the Muslim world: “We’re in a world war against a messianic mass movement of evil people.”

It was one of many signs that Trump was susceptible to ideas of a civilizational battle against “Islamo-fascism,” which Norman Podhoretz and other neocons argued, in the wake of 9/11, would lead to World War III. In their millenarian ardor and inflexible support for Israel, the neocons find themselves in a position precisely cognate to evangelical Christians—both groups of true believers trying to enact their vision through an apostate.

But perhaps the neoconservatives’ greatest strength lies in the realm of ideas that Irving Kristol identified more than three decades ago. The neocons remain the winners of that battle, not because their policies have made the world or the U.S. more secure, but by default—because there are so few genuinely alternative ideas that are championed with equal zeal.

The foreign policy discussion surrounding Soleimani’s killing—which accelerated Iran’s nuclear weapons program, diminished America’s influence in the Middle East, and entrenched Iran’s theocratic regime—has largely occurred on a spectrum of the neocons’ making. It is a discussion that accepts premises of the beneficence of American military might and hegemony—Hobbes’s “ill game”—and naturally bends the universe toward more war.

At a minimum, the traditional Republican hard-line foreign policy approach has now fused with neoconservatism so that the two are virtually indistinguishable. At a maximum, neoconservatism shapes the dominant foreign policy worldview in Washington, which is why Democrats were falling over themselves to assure voters that Soleimani—a “bad guy”—had it coming. Any objections that his killing might boomerang back on the U.S. are met with cries from the right that Democrats are siding with the enemy. This truly is a policy of “maximum pressure” at home and abroad.

As Trump takes an extreme hard line against Iran, the neoconservatives may ultimately get their long-held wish of a war with the ayatollahs. When it ends in a fresh disaster, they can always argue that it only failed because it wasn’t prosecuted vigorously enough—and the shuffle will begin again.

Jacob Heilbrunn is the editor of The National Interest and the author of They Knew They Were Right: The Rise of the Neocons.

How populism will heat up the climate fight

Politicians know what they have to do, but must beware the ‘gilets jaunes’

Philip Stephens

web_populist anti- green protests
© Ingram Pinn/Financial Times

“We all know what to do, but we don’t know how to get re-elected once we have done it.” Jean-Claude Juncker, then Luxembourg’s prime minister, issued his painfully prescient warning in 2013. Sure enough, the austerity programmes that followed the global crash whipped up a populist storm from which the old politics has still to recover.

History is in danger of repeating itself. As Mr Juncker might say, the politicians know what they have to do about climate change, but beware the gilets jaunes.

The success of the populist movements that have destabilised Europe’s ancien regimes is rooted in a perception, more than half-true, that those near the bottom of the pile were burdened with bailing out the elites responsible for the financial crisis.

The left-behinds rather than the bankers bore the brunt of austerity. Now think about cutting carbon emissions. The same group — low earners living in provincial towns and villages — are first in the line of fire.

Pace Donald Trump’s appearance at Davos, the phoney war about the climate is over. One way or another global warming is set radically to reshape our economies and societies. Public opinion will no longer let politicians get away with a few fine words, a handful of wind farms and tax incentives for electric cars.

Raging bushfires in Australia, melting glaciers in Greenland and unnerving shifts in weather patterns almost everywhere have disarmed all but the most obstinate climate deniers. Ask Scott Morrison, the Australian prime minister, who not so long ago exulted in his role of chief cheerleader for Australia’s coal industry.

Business is also discovering that a token nod in the direction of sustainability is insufficient. As ever, there has been an abundance of hot air in Davos, but corporate boards are also feeling real pressure to take global warming seriously. Shareholders and stakeholders want to know how the boards are making their businesses climate friendly, investors are beginning to shun the fossil fuel industry and companies large and small are being asked to produce green audits.

None of this makes the politics any easier. Even if the pledges made by dozens of governments to reach a net zero carbon world by 2050 look hopelessly ambitious, the promised policy upheaval is immense. Tax codes will have to be rewritten from scratch.

Businesses will have to measure and reduce carbon content at every point in their supply chains. Financial institutions are already under pressure to cut their exposure to fossil fuels. Before long every company will be rated on its carbon footprint.

Motorists will struggle, however, to accept that the internal combustion engine has had its day — at least until someone invents a cheap battery with a decent range. The switch from coal, oil and gas to sustainable energy will require the replacement of hundreds of millions of household heating systems. Cheap flights will disappear.

A shift from consumption of meat to plant-based products will not invite universal applause. Nor will the tax increases needed to finance decent public transport and better insulation of buildings.

The way to make this palatable, politicians think, is to wrap up the changes in “green deals” — huge packages calculated to harness public and private money, recalibrate taxes, subsidies and other incentives and compensate the biggest losers. Only this month the European Commission unveiled a €1tn programme to map the path to carbon neutrality by 2050. It is a bold project, including hefty compensation for the big losers from shutting down fossil fuels production as well as tougher regulation and a cross-border carbon tax.

But no one, as far as I can see, has come up with plans to offset the cost of this on the people it will hurt most — those who need to drive to work in the ancient, gas-guzzling cars that spew out the most carbon; the householders least likely to have decent insulation or the cash to replace fossil fuel boilers; and the people for whom cheap air travel means a chance to take their one annual holiday.

These are the voters to whom Mr Trump was speaking in Davos — the same ones who have fuelled the rise of populist parties of the far-right and left across Europe.

Most often they live in small towns and villages beyond the big cities where sustainability has become a fashion statement. If anyone doubts their anger, they need only look at the gilets jaunes in France, whose year of protest against Emmanuel Macron began with an increase in fuel taxes.

There are a few obvious ways to soften the impact. Better, subsidised public transport in provincial towns would be a start. Governments can also finance scrappage schemes to encourage people to swap to smaller, fuel efficient cars, and offer grants for sustainable heating systems. But they should know halfhearted handouts will not be enough.

A large swath of voters look at green policies through the same prism as Mr Trump — something that wealthy globalists inflict on the poor when they are not hopping from continent to continent on their private jets. In their own minds, the left-behinds have already been swindled by globalisation and robbed by the bankers.

They are in no mood to be cheated again. The question I have is whether the liberals leading the decarbonisation charge are ready to finance the big income transfers needed to make it politically sustainable.

Fed to beat a faster retreat from repo market

Interventions in short-term funding markets will be curtailed again from Friday

Colby Smith in New York

Federal Reserve Alleged Target of FBI Bombing Plot Sting...Pedestrians walk past the New York Federal Reserve building in New York, U.S., on Wednesday, Oct. 17, 2012. A Bangladeshi man was arrested for allegedly plotting to bomb the New York Federal Reserve in lower Manhattan as part of a sting operation by federal authorities who provided the suspect with fake explosives. Photographer: Scott Eells/Bloomberg
© Bloomberg

The Federal Reserve is accelerating the pace of its withdrawal from short-term funding markets, even as investors’ demand for the central bank’s cash remains elevated.

The New York arm of the Fed announced on Thursday that it will further cut the size of its interventions in the repo market, where investors exchange high-quality collateral such as Treasuries for cash. It is the latest step in its attempt to wean investors off the funding it has provided since short-term borrowing costs spiked in September.

The new plan reduces the maximum amount the Fed will lend overnight each day from $120bn to $100bn — a change that will kick in on Friday. Moreover, the Fed will limit the amount it will lend in the form of two-week loans to $25bn as of Tuesday, from its current $30bn offering, and pare that amount even further in early March. At that point, the Fed will lend a maximum of $20bn on a two-week basis.

Analysts were primed for the shift, thanks to numerous reminders from chairman Jay Powell and other Fed officials in recent weeks that the central bank seeks to gradually transition away from active interventions in the repo market. The reductions were somewhat sharper than some had expected, however.

Mr Powell said this week in testimony to Congress that he expects the amount of bank reserves — or cash held at the central bank — to return later this year to a level sufficient to avoid a repeat of September’s cash crunch. It is widely thought that the repo market went haywire five months ago because reserves had dropped too low and banks were holding back from short-term lending.

The Fed has been buying $60bn of short-dated Treasury bills each month to increase the amount of cash in the system, and therefore reserves. Banks currently hold $1.58tn in reserves at the Fed — up from $1.3tn in September.

“The optics are good,” said Lou Crandall, chief economist at Wrightson Icap, of the new schedule of Fed lending activity, which he said represented a suitable pace for scaling back intervention.

Demand for the Fed’s cash remains high, however, with the four most recent two-week loans generating demand roughly two times the $30bn that was on offer. Analysts have attributed the elevated amount of bids to the fact that the rate at which the Fed is providing its funding has been relatively low, less than 1.6 per cent on average.

As such, Mr Crandall said he expects to learn a lot more about the market when the size of the two-week offering drops to $20bn.

“It may give us more information on how much demand there is,” he said.

The light at the end of the equity tunnel could yet be a train

US and European indices have rebounded since the coronavirus sell-off

Katie Martin

A peek at global stock indices will tell you that all is well in the world.

US and European stocks are at record highs after their coronavirus-induced wobble at the start of the year, while the benchmark indices in Hong Kong and mainland China have also started to recover.

Diehard optimists can point to a number of reasons to be cheerful: rating agency Moody’s said that for Europe and the US, at least, the epidemic should have a “muted” impact on economic activity. Investment bank Goldman Sachs says the markets’ appetite for riskier bets is rebounding as “virus concerns fade”. By some measures at least, the pace of new infections appears to be slowing.

Remember the rise in tensions between the US and Iran? The brief flurry of alarm that sent oil prices rattling higher and hit stocks? That was just over a month ago, and most investors have not given it a second thought in at least three weeks. With luck, this virus outbreak will prove to have a similarly short shelf life. The talk is of light at the end of the (fairly short) tunnel.

But as any good pessimist can tell you, that light can turn out to be a train.

In fairness, broad equity market indices are a bad gauge of investor nerves.

Some of the pick-up in China’s equity markets may be seasonal. Nomura says that, on average, mid-February delivers a good patch for Chinese equity sentiment, which means the latest mini-rebound “may be no more than a shortlived fake-out”.

Double-digit drops in some China-focused stocks and a rally in the safest portions of the bond market also serve as signs that fund managers are taking sensible precautions. “Markets are not as complacent as they look,” analysts at Barclays said in a note to clients this week.

Still, it is easy to imagine a scenario where that level of concern proves nowhere close to sufficient.

“There is enough of a probability that the coronavirus becomes an unusually large disruptive market event that it warrants portfolio managers taking a close look at potential hedges,” said Alan Ruskin, an analyst at Deutsche Bank.

Buying US government bonds or amping up dollar exposure is a good way to take cover, he suggests. Taking out (very cheap) protection against a rise in currency-market volatility is also a good option.

After all, Mr Ruskin points out that already historically low currencies volatility is highly unlikely to sink meaningfully lower if the virus passes. Nor is the dollar likely to crash if the news turns more positive. By contrast, the virus-induced weakness in base metals could very easily turn round quickly if the news improves, making negative bets on that market a risky strategy in itself.

Failing to take this outbreak seriously, however, is likely to be the riskiest bet of all.

Assessing the Economic Effects of the Coronavirus

By: Phillip Orchard

There’s irony in the fact that, as Chinese Vice Premier Liu He was in Washington on Jan. 15 signing the “phase one” deal formalizing the impasse in the U.S.-China trade war, a stealthier threat to global trade was spiraling out of control at home. Over the past few weeks, the mysterious new coronavirus epidemic has begun to do what tariffs never quite could.

The scramble to contain the outbreak has shut down Chinese factories en masse, put China on the brink of twin financial and political crises, and sent foreign executives scurrying to revisit plans to pull out of the country. And now, with the U.S. and other major economies imposing strict border controls and bans on travel in and out of China, the flow of Chinese goods to its most important consumer markets is at risk of nose-diving.

The severity of potential economic disruption – both for China and the world – is impossible to forecast. (Not that that’s stopped anyone from trying.) The impact will depend mostly on just how much worse the outbreak gets, which itself can hinge on the evolutionary vagaries of microorganisms. There’s also unpredictable factors as varied as the ability of oil exporters to agree on production cuts, ethnic tensions involving Chinese tourists in Southeast Asia and the medium-term investment plans of tens of thousands of businesses. Perhaps the most pernicious is fear – the sort that was emptying out airplanes even before the travel bans kicked in.

We can say this: Absent a mutation in the virus that accelerates both its spread and lethality or the eruption of another black swan event, most of the economic damage will likely be short-lived. And most of the hardest-hit sectors will be primed for turbocharged recoveries. But there are certain risks where a rupture would cause colossal long-term damage. And, at minimum, the crisis will expedite a profound paradigm shift about the wiring of the global economy.

Short-term Pain

The most direct comparison to the current pandemic is the SARS outbreak in 2003, which dinged Chinese gross domestic product by as much as $40 billion, reducing annual growth by between 1 and 2 percent. Globally, the bill for the pandemic ran up to as much as $100 billion. Within a year, China had returned to pre-outbreak growth levels.

But this benchmark tells us only so much. With the new virus, which originated in Wuhan, the scale of the lockdown has been much wider. It would be painful enough if it extended only to the outbreak’s epicenter in Hubei province – an area with the population of Argentina and the GDP of Sweden – which functions as a rail and shipping hub that’s vital to the government’s efforts to stitch together the wealthier coastal provinces and the interior (a core Chinese imperative).

But the lockdown was extended nationwide, and disruptive quarantine measures have been reported across the country, including all-important advanced manufacturing hubs like Shenzhen, Guangzhou and Shanghai that were most affected by the trade war. Moreover, a lot has changed in China since 2003. The population is older, more urbanized, more dependent on internal consumption, and more reliant on vast internal flows of migrant labor – all factors that can amplify both the spread of the virus and the extent of its disruption.

As a result, the coronavirus has hit the global economy with three main waves: The most immediate was Chinese consumption (nearly 40 percent of Chinese GDP in 2018), as hundreds of millions of people canceled Lunar New Year travel plans; restaurants, shopping malls and movie theaters were suddenly emptied; and so on. This is also a problem for foreign firms like Starbucks and Walmart that have pegged their growth strategies to the growing appetites of Chinese spenders, as well as countries such Cambodia and Thailand that have come to economically rely on Chinese tourists.

The second was labor disruption. Today, China is home to an estimated 288 million migrant workers, or roughly one-third of the country's total labor force, most of whom return to their hometowns during the New Year. Though most Chinese factories outside Hubei were allowed to go back to work this week, operations won’t reach full speed until travel restrictions and fear subside.

The third wave hit as countries throughout the world (plus, crucially, Hong Kong) started to impose restrictions on travel to and from China. This highlights perhaps the biggest difference between today and 2003: China is much more tightly integrated with the world – and, despite halting U.S. efforts to pare back this interdependence, at the center of a dizzying network of supply chains optimized overwhelmingly for efficiency, not resilience. Shutting down cross-border travel impedes business and decimates tourism, of course, but it also hampers shipping, as “belly cargo” on commercial flights accounts for more than half of air freight.

The worst-case scenario for global trade is that the contagion risks will compel the U.S. and Europe to ban not just commercial air travel but oceanic shipping as well. This is highly unlikely; the virus can’t survive on surfaces for long, particularly not a months-long journey, and the relatively small number of crew arriving at ports won’t overwhelm their health screening capacity. Still, Chinese ports can’t operate without stevedores, nor ships without sailors. As a result, even without a sweeping ban on shipping,

Chinese port activity has slowed by an estimated 20 percent since mid-January. This is a problem for exporters foreign and domestic in China, as well as for commodity exporters like oil producers, and manufacturing operations elsewhere that depend on intermediate goods made in China. (This was a side effect of most of the U.S. tariffs as well.) Auto assembly operations in Japan and South Korea have already been suspended because of a shortage of parts, for example. Some 450 U.S. companies source components from Hubei province alone.

Long-term Risks

The short-term impact may be immense, but as with the SARS epidemic, there’s minimal structural damage being done to the Chinese economy, and most affected sectors will bounce back within a matter of months. This isn’t always the case with black swan events. The 2011 floods in Thailand, where investors had already been spooked by cycles of mass political violence, wiped out hundreds of thousands of cars from automaker inventories and shut down critical infrastructure for nearly a year.

Japan still has yet to fully recover from the Fukushima disaster. But unlike natural disasters, conflicts and other more destructive black swans, the fallout from epidemics is comparatively easy to manage. Factories and public transportation lines in China are closed, not buried under rubble or coated in radioactive fallout. Hundreds of millions of people may be stuck at home, but the virus isn’t exactly wiping out the Chinese labor force for good.

There’s little stopping key pillars of the Chinese economy like fixed-asset investment and the services sector from rebounding quickly, especially as the government opens the stimulus spigots. And China-centric supply chains can’t be rerouted quickly or cheaply enough for the country to be replaced in the meantime. Moreover, Chinese manufacturing grinds to a halt every year during the Lunar New Year, typically taking weeks to return to full production.

Most importers of Chinese goods had likely already stocked up in anticipation. From this perspective, the epidemic came at a pretty good time.

Still, there are three key long-term risks to watch. The first is the trade war. China was already likely to struggle to meet the import pledges it made in the “phase one” deal. To be sure, the epidemic (and ongoing problems with African swine fever and a new strain of the avian flu) will likely compel it to buy more U.S. farm products.

But imports of other U.S. goods, particularly crude and liquefied natural gas, won’t be as necessary, and government funds earmarked to help Chinese importers meet the targets may have to be diverted to short-term rescue measures at home. China may have a good excuse if it falls short when the U.S. conducts its reviews of Chinese progress on implementing phase one in the fall. But whether the White House responds to such a scenario charitably or restarts the trade war may depend entirely on election-year political factors. At minimum, the outbreak will force Beijing to lean more heavily on things like subsidies and state-owned enterprises.

A return to currency manipulation is also possible, though fairly unlikely. This means the already low chances of progress on negotiating a phase two deal – the one that would ostensibly address the fundamental drivers of U.S.-China trade tensions – are dropping further.

The second risk to watch is the one keeping Chinese leaders awake at night the most: that even short-term pain in one vulnerable sector or another will trigger a cascading crisis. Put simply, the Chinese economy is overwhelmed with interlocking risks, from unchecked shadow lending to a fragile banking system to widespread asset bubbles.

As a result, deleveraging and “financial de-risking” have been the foremost priority for Beijing over the past few years. It's had enough success with efforts like metabolizing nonperforming loans, curbing reckless lending and rescuing ailing banks to prevent an uncontainable crisis from rupturing.

But the limits of its ability to micromanage the economy have also been exposed, with Beijing often finding itself playing a sort of high-stakes game of whack-a-mole, where its efforts to address one problem worsen a problem somewhere else. In its campaign to stem a wave of bond defaults among small and medium-size enterprises, for example, it’s struggled to force banks to lend to troubled firms.

Today, SMEs account for roughly 60 percent of the Chinese economy, plus around 80 percent of Chinese jobs. Compared to state-owned firms and private sector giants, SMEs are ill-suited to survive the cash-flow hits that result from the outbreak; in a recent survey, around a third said they couldn’t last more than a month on their current savings.

In response, Beijing is redoubling efforts to push banks to lend to the sector and reducing interest rates, but these measures will further weaken balance sheets across the banking system, which is already teetering amid a string of near-failures in 2019. Beijing is also cutting taxes, which will worsen the default risks posed by debt-ridden local governments (which Beijing is now allowing to pile up new debt to spur infrastructure spending).

It's cutting pension contribution requirements, which will amplify China’s demographic crisis.

It even appears to be easing off its shadow lending crackdown. So even if China avoids a financial meltdown now, its moves will increase the risk of a crisis over the long term. Keep in mind that China was racing to eradicate these risks – and, as a result, loath to flood the economy with fiscal stimulus – before the next global recession. That’s still looming.

A Death Knell for Interdependence

Finally, the epidemic will make other countries more wary of China’s outsize role in global manufacturing. Since the 1990s, the cutthroat economics of globalization have pushed supply chains to become ever more complex and geographically diverse.

For example, the Jeep Cherokee, the most “American-made” automobile in 2019, is built with components sourced from dozens of countries. But these economics have also pushed for the manufacturing of particular components, particularly research-intensive high-end technologies, to be consolidated in one or two countries.

The result has been the proliferation of chokepoints.

It’s not just China.

Taiwan dominates semiconductor fabrication. Japan, as we saw last summer in its dispute with South Korea, dominates production of various chipmaking materials.

The U.S. is currently mulling how to leverage its dominance over chip design, software and the dollar-denominated global financial system to blunt China’s technological rise. But China has certainly made itself the king of chokepoints. And chokepoints can be really bad for business.

The U.S.-China trade war and “tech war” have underscored just how much supply chain bottlenecks can be weaponized or targeted for strategic or political purposes – and how easy it is for firms to be caught in the crossfire. Likewise China’s crackdowns in Xinjiang and Hong Kong. The coronavirus outbreak, along with the problems endemic to the Communist Party’s model of governance its exposed, has merely crystallized the risk of being dependent on China that much more.

China isn’t the only manufacturing center vulnerable to epidemics, natural disasters, political spasms or geopolitical disruption. But until its relationship with the West finds stable long-term footing, and until its government can be confident in its long-term hold on power, China will be home to the most tightly concentrated and explosive matrix of supply chain risks.

This doesn’t portend a future of total Chinese isolation from global supply chains. Its manufacturing footprint and labor pool are extremely difficult to replace at scale, while the lure of access to Chinese consumers alone is enough to give most multinational corporations pause. Surveys indicate that most firms planning to leave China are doing so only partially, with the goal of effectively setting up parallel supply chains as a means to inoculate themselves from tariffs, Beijing’s capacity for coercion and whatever black swans may come.

Firms may be merely seeking to protect themselves from events beyond their control. But the broader effect will be an accelerated if fitful disentangling of the chains binding Chinese and Western countries. This is a dramatic reversal of a more than 30-year trend with any number of potential geopolitical implications – the ability of nation-states to weaponize interdependence chief among them.

Refinancing Boom Fuels Mortgages to Postcrisis Record

Lenders extended $2.4 trillion in home loans last year, the most since 2006

By Orla McCaffrey

The average rate on the 30-year fixed-rate mortgage dropped to 3.74% at the end of 2019, down from 4.55% a year earlier. Photo: Adolphe Pierre-Louis/Zuma Press 

The mortgage market in 2019 had its best year since the height of the precrisis boom, the latest sign that housing is firming up after showing signs of weakness early last year.

Lenders extended $2.4 trillion in home loans last year, the most since 2006, according to industry research group Inside Mortgage Finance. That was also a 46% increase from 2018.

Robust mortgage lending is generally a good sign for housing, which has seen a rebound in price growth and home sales after a period of declining gains. A refinancing frenzy, induced by last year’s trio of interest-rate cuts, fueled the mortgage making and helped steady the industry. The refinancing boom also bodes well for the broader economy, since homeowners saving on their monthly mortgage payments are likely to spend more on goods and services.

“When a large and cyclical part of the economy—housing—is starting to improve, it’s a good sign for the economy at large,” saidSam Khater,chief economist of mortgage-finance giant Freddie Mac.

The Mortgage Bankers Association estimates that refinancings made up 38% of mortgage originations last year.

Kristen Devlinand her husband decided to refinance their south-central Pennsylvania home last fall while trying to pay down a pile of medical bills.

Their rate dropped from 6.25% to 4.99%, cutting their monthly payment. The couple managed to pay down their medical bills and chose to keep paying their prerefinancing payment of $1,250 for their three-bedroom, three-bathroom house. The move will shave six years off their mortgage term.

“I was very pleased to save money and proud of successfully adulting,” Mrs. Devlin said.

In Philadelphia,Annie Heckenberger’solder brother told her it would be smart to refinance the house she bought about a year earlier. His advice helped her lock in a new rate of 3.88%, more than a percentage point lower than her original one.

“It was more paperwork than I anticipated but worth it in savings,” Ms. Heckenberger said.

The average rate on the 30-year fixed-rate mortgage, the most popular home loan in the U.S., dropped to 3.74% at the end of 2019, down from 4.55% a year earlier. Freddie Mac said Thursday that the average rate is now around 3.6%, its lowest level in more than three months.

Mortgage making accelerated at the end of the year. Last year’s fourth-quarter totals were the biggest quarter since the third quarter of 2005.

December sales of existing homes jumped nearly 11% from the year before, according to the National Association of Realtors. The NAR said, though, that the year-earlier period had been a particularly weak month for sales in part because of buyers’ uncertainty around the federal government shutdown.

But the uptick in mortgage lending doesn’t mean buyers will have an easy time this spring. Major barriers including a lack of housing supply and relatively tight bank-lending standards are pushing homeownership out of reach for many Americans.

Home prices continue to rise faster than incomes, fueling concerns that affordability will remain an issue for buyers, especially those looking to buy for the first time. And the tight supply that has choked popular coastal markets has started to seep into other cities like Boise and Philadelphia that have traditionally been considered more affordable.

Low rates aren’t always entirely good for those first-time buyers. Low rates can also inflate home prices, since borrowers can afford bigger mortgages and might bid more for homes than they otherwise would.

It isn’t clear how long the mortgage boom will last. Refinancings are expected to decline through 2021, dragging down overall mortgage volume, according to estimates from the Mortgage Bankers Association.

Still, an expectation that interest rates will hold steady or even keep falling is a good sign for mortgage lending in 2020, analysts said. Some mortgage brokers said last year’s boom is extending into the new year.

“It’s very likely that the first quarter or first half of 2020 will be bigger than the first half of 2019,” saidGuy Cecala,chief executive of Inside Mortgage Finance. “People are encouraged by lower rates.”

Tim Lindsey,an originating branch manager at CrossCountry Mortgage in Greenwood Village, Colo., said the number of mortgages he processed grew more than 25% last year. Mr. Lindsey said he hasn’t had a day off since New Year’s Day.

“There was an incredibly large amount of origination from previous years,” Mr. Lindsey said.

“Everyone I know had their best year ever.”