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>Unfortunately when rates are kept artificially low to avoid financial catastrophe, resources are misdirected into ventures that should never have been funded i
by clove 10y ago
>Unfortunately when rates are kept artificially low to avoid financial catastrophe, resources are misdirected into ventures that should never have been funded in the first place, and we kick the financial can down the road.
Untrue. Rates are not kept low for an explicit purpose of "avoiding catastrophe." They are kept low to encourage borrowing.
Resources are never "misdirected," as both the lender and the borrower must agree on the venture. This system allows for experimentation and innovation. As someone sitting on the sidelines, it is easy to call many investments - usually after they fail to produce ROI - failures that should not have been funded in the first place.
However, the economy is a cyclical process. Your comment projects your thinking that it works as an equilibrium, which has never been the case. Eventually, speculation dies down, rates increase, borrowing deceases, saving increases, companies repair balance sheets... etc.
Then the cycle begins again.
- roymurdock 10y agoQE, in conjunction with the Fed dropping FRR to 0% for 6 years, was a direct response to the financial collapse of 2007-8. Obviously policymakers weren't going to explicitly say - "wow guys we screwed the pooch on this one, time to lower rates and inject liquidity to help banks (and the business/individuals they lent to) clean up their balance sheets full of mispriced, risky assets and avoid financial catastrophe" - but sometimes you need to read between the lines. There is being (equilibrium) and there is becoming (cycles away from/towards equilibrium). The economy is always becoming, but it is striving towards a pure state of equilibrium where supply and demand in every market are working to equal one another, but never getting there.
- AnimalMuppet 10y ago> Resources are never "misdirected," as both the lender and the borrower must agree on the venture. That's not what "misdirected" means. In economics, "misdirected" investment is investment into unproductive things. It doesn't matter whether the lender and borrower agreed with a bad idea; if it's a bad (unproductive) idea, the investment in that idea is still misdirected. Now, you're right that after the fact, it's easy to call what wasn't clear at the time. But the flip side is also true: In the heat of the moment (when you think there's a lot of money to be made), it can be hard to see what will be blindingly obvious after the fact - that this is actually a really bad investment.