The birth of a new financial crisis
Seven years ago, the United States placed the interest rate in a range between 0 and 0.25% for the first time in history. Seven years later, the Federal Reserve will begin to raise them slightly in fear of a new financial crisis. Faced with this news, most analysts wondered when they will. This afternoon, the president of the Federal Reserve has clarified the doubts, "the interest rates at the current levels for a prolonged period of time can generate excessive risks and undermine financial stability", warning that the rise in rates is imminent.
Why are you taking excessive risks? We are going to do a little review of how interest rates have moved in recent years and how they have affected the economy.
Interest rates were lowered in 2001 to ease the effects of the dot-com bubble in both Europe and the United States. This encouraged people to go into debt, increasing consumption and investment. A few years later, this indebtedness and investment turned out to be excessive, causing a financial and real estate bubble in many countries of the world. This excess supply of money (low interest rates) caused people to consume beyond their means, generating the financial crisis of 2008. Economic analysts considered that interest rates had been too low for too long.
Well, interest rates in the United States were between 1% and 2% for three years, while right now we are going for the seventh consecutive year with interest rates between 0% and 0.25%, its lowest level ever. Fasten your seatbelts, the roller coaster is getting higher and higher.
Low interest rates over long periods of time have been shown many times in history to create bubbles. Therefore, the question we should ask ourselves is not when interest rates will rise, but why they have not done so before. The excuse has been that it has taken much longer to recover economic growth, which has forced to keep rates low for longer.
Flooding the economy with cheap money gives peace of mind and confidence. Stock markets rise, states can finance themselves cheaply (even with negative interest) and investments increase. That should create a lot of jobs and increase productivity, but in many places it is not happening, it simply increases profits thanks to financial engineering.
If lowering rates and injecting liquidity into the economy were the philosopher's stone of finance, there would be no more recessions or economic crises. Instead, recessions continue and no one knows what will happen if those policies continue to be applied. The only thing we know is that the last time they were applied they caused a stronger crisis than the one they cured.
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