Explaining the Impact of Low Rates

March 20th, 2010

Barry Ritholtz has a good explanation of how low interest rates helped precipitate the housing bubble.

Merely regulating lending institutions isn’t the largest issue. The issue is central banks, no matter how intelligent the people running them are, don’t fully understand what’s going on in the economy nor the effects of their monetary policy. Greenspan seemed justified in keeping interest rates low at the time–we just entered a recession due to the technology bubble’s collapse, and September 11th threatened to make it magnitudes worse. Under those conditions, low interest rates seem justified.

But they also helped inflate another bubble, one that led to a financial crisis. This perfectly illustrates why government having such an integral role in the economy is so dangerous.