Research: Low interest rates caused crisis

BANKS were pushed into risky lending by low interest rates, creating the sub-prime bubble and causing the global financial crash, new research out claims – and low rates could again be failing to help the economy in the long run.

Low rates in the US and other western economies in the 2000s led banks to search for a higher return on their investments, accepting riskier mortgage applicants, according to Mathos Delis, presenting his conclusions at the Royal Economics Society’s annual conference this week.

The paper compares the risk profile of loans made at different points over the last 25 years and concludes interest rates did impact on lending decisions made.

Lowering rates at time of economic weakness – after the dotcom bubble and the 9/11 terrorist attacks, for example – simply put off the crash to a later date, and allowed an additional decade of even riskier investments to build up, the researcher argues.

“Our results are all the more striking as the present stance of the Federal Reserve is to maintain ultra-low interest rates in an attempt to resurrect the sagging US economy,” said the authors.

“Central banks should consider the possible adverse effect of their loose monetary policies on bank risk-taking.”

The claims come just a week after the Bank of England’s chief economist Spencer Dale warned low interest rates are keeping weak firms afloat and could in time prevent the necessary rebalancing of the UK’s economy.