The Next Financial Crisis | The New Republic

The Next Financial Crisis | The New Republic.

COMMENT: If you wish to scare yourself senseless, take a gander at this think piece from the The New Republic. In essence, the piece distills out that the Federal Reserve creates a larger and larger cycle of boom-bust by lowering the interest rate in bad economic times and bailing out banks when things go south. So banks, whose reason for being is making money, have an incentive to take greater investment risks and know that they won’t suffer too bad if things go terribly wrong. This pattern is almost a century old and difficult, but possible, to break.

FROM THE ARTICLE: The Fed did not create this atmosphere of elevated risk, but it ended up playing a central role in perpetuating it. Since the 1970s, successive financial crises have required ever more dramatic reactions from the Fed. Every time there is a potential financial meltdown, the Federal Open Market Committee quickly cuts short-term interest rates. These cuts have become larger and larger over time, now essentially taking interest rates to zero. Each round of interest-rate cuts has made sense when a given crisis breaks. But these cuts–which effectively function as bailouts for banks that have gotten into trouble–often helped bring about the next financial crisis. And the crises are getting larger, not smaller, over time.

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