Low interest rates were NOT the cause of the financial crisis
Government intervention was the main cause of the global financial crisis, John Taylor, a Stanford University economics professor, said Wednesday. Interest rates stayed too low for too long in 2003, 2004 and 2005, exacerbating a boom in housing and pushing investors to stretch too far for extra yield, John Taylor said.
John Taylor, the Stanford Economist, was commenting on the research published recently. While recently it has become quite fashionable to cite data and blame Government for collapse of the financial system, the emphasis here seems to be misplaced. The paper draws conclusions blaming low interest rates when in fact it was lax regulation led to development of highly risky investment instruments that nobody could understand.
If anything, low interest rates were responsible for expansion of the economy that ushered in unprecendented prosperity for common man. I myself am a beneficiary of these policies, having purchased a small (and affordable) home in early 2000, which otherwise would have been almost impossible. If the financial industry had not fought tooth and nail against regulations to govern securitization of mortgages, we perhaps may never have had the melt down that happened.
It was the greed of investment bankers who were making money hand over fist selling these esoteric financial instruments that led to the melt down. But there is no metric to measure greed, so economics will never give us the right answer for the meltdown.