When central banks manipulate interest rates, they disrupt normal patterns of savings and investment. They pump up economic bubbles that ultimately pop and kick off economic crashes. We saw this vividly in the 2008 financial crisis. Low interest rates, along with government policies, encouraged unsustainable investment in housing. When the bubble popped, it nearly brought the entire economy down with it.
There is another problem with central bank interest rate tinkering that exacerbates bubbles.
It hides inherent risk.
When interests rates remain artificially low, it suppresses risk premiums and drives further malinvestement.
Thorsten Polleit writing for the Mises Institute Fed Watch explained the mechanism.
Inherent risk exists with any investment, but some are riskier than others. In an unfettered market, investors reap a reward in the form of higher yield for taking on higher risk.
This post was published at Schiffgold on AUGUST 15, 2017.