3 ms·
It's important to separate out fraud from low interest rates. Low rates absolutely drive investment, and riskier investment at that. But the issue with 2008 w
by mywittyname 5y ago
It's important to separate out fraud from low interest rates. Low rates absolutely drive investment, and riskier investment at that. But the issue with 2008 was fraud in the lending market, not necessarily the low rates.
Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.
- diognesofsinope 5y agoFor the record, the evidence of 'widespread' fraud is extremely weak: See Antoinette Schoar's (MIT) work: https://www.nber.org/papers/w20848 https://www.nber.org/papers/w20848 It makes for a good news story that regular Americans understand and frankly want to hear (the banks were bad). But if you really dig into the reports, e.g. Financial Crisis Inquiry Report, almost the only fraud comes from misreporting of income which is essentially consumers lying. There could be other documentation issues, but underwriting almost entirely depends on credit score + income, so they're fairly trivial.