Low, low interest rates are not an unmitigated good / by kevin murray

Ever since the financial crisis, the United States has tried to normalize its interest rates, of which, the Federal Reserve has kept interest rates significantly below the previous rates implemented over the last two generations; so that, since 2008 at the height of the financial crisis, the Federal Reserve dropped its interest rates to unprecedented historic lows, and it was not until December of 2015, in which it slowly began increasing rates, but as of March 2019, the Federal Reserve has effectively stopped raising interest rates in which the Federal Reserve has stated publically that it intends to keep the Federal funds rate at the current 2-1/2 percent, in the absence of any untoward economic and inflation factors that would necessitate movement of that Federal funds rate in either direction.


For all those that borrow money, the fact that the cost of borrowing money is so low, is quite beneficial, for as they say, a dollar saved, is the same as a dollar earned.  On the other hand, for those that are savers of money, and hence have historically received interest bearing payments through money market funds, certificates of deposit, and in general, the loaning out of money, this last decade has precluded those people and institutions from earning any real return on their money, and subsequently has meant that those people and institutions in order to make money from their monetary assets have had to look at other instruments of investment, in which, those instruments are almost always going to involve significantly more risk.


Additionally, for institutions, the cost of money, is a significant factor in the taking on of additional debt, so that, companies that are even of the highest credit rating, are tempted when interest rates are incredibly low, to borrow money, not so much because they need it for the expansion of their business, but rather because many of these corporations, in order to get around corporate federal tax codes, find it beneficial to do so.  Additionally, companies borrow money at exceedingly low rates in order to leverage up and to buy other corporations, or for dividend payments, and so forth.


The problem though for today's banks that issue out loans is that because the amount of interest that they are receiving on those loans are historically much cheaper than in previous generations, those banks in order to maintain or to increase their profits, must make up for the lack of "spread"  and yield on those loans with volume, instead.  Unfortunately, though, at the end of the day, there are only so many truly credit worthy corporations out there and then there is a steady drop off in quality of loan worthiness.  The end result of having all of these historically low interest rates, is that, the balance sheets in aggregate of these corporations, because of their borrowing, have increased substantially, and if and when, those balances sheets in aggregate, are not able to keep those loans current or to pay back those loans at all, then another sort of financial crisis will occur, from the accumulation of essentially bad loans that will never be paid back.


So then, with artificially low interest rates, we find that rather than the money being borrowed in which the economy as a whole benefits, instead, the economy benefits somewhat, but far too much of that money is misallocated, into overleveraged balance sheets, in which, the stability of the financial system rests upon a foundation of low interest rates, forever; and should the day come when interest rates are truly normalized, those that are indebted, will not be able to service that debt, leading to another financial crisis of epic proportions.