Interest rates

By Heleen Mees

With anger directed towards bankers and rating agencies alike, this may be a good time to remember that low interest rates, rather than faulty mortgage products, are the root cause of the financial crisis and ensuing Great Recession.

I once quipped that to understand the origins of the financial crisis and recession, one should not read Michael Lewis’s The Big Short, but economist and Nobel Laureate Arthur Lewis’s Economic Development with Unlimited Supplies of Labor instead.

The Big Short provides an entertaining account of how low-income households in the US were force-fed unaffordable subprime mortgages, for the sole purpose of adding to the fortunes of Wall Street bankers. But if less subprime mortgages had been originated in the 2000s, the bubble (and bust) in the prime US mortgage market would arguably have been more extensive than it was. 

By Nariman Behravesh

The full fury of the two shocks that have hit the world economy – the financial crisis and record oil prices – is beginning to dissipate. Unfortunately, the full impact of these shocks on the real economy has yet to be felt. 

By Morris Goldstein

With a global recession in prospect, now is the time to strengthen the provisions of the International Monetary Fund’s old Compensatory Financing Facility and to put it back into action. 

By Jon Danielsson and Casper de Vries

Neither the recent massive money market injections, the coordinated lowering of interest rates nor the use of public funds to recapitalise banks have done much to restart interbank lending. This action did not solve the underlying problem preventing interbank lending: extreme information asymmetry. 

By John N Muellbauer

When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.

  • The failure to keep Lehman Bros functioning as a going concern.
  • The failure of the European Central Bank and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the cut of October 8, 2008 was too timid).

A convincing argument for independent central banks adopting an inflation targeting framework is that, where central banks are forward looking and responsive, they should be able to avoid deflationary slumps. The markets then should expect the central banks to assess clearly the global economic situation and the downside risks, and take decisive action.