Low Rates Are Here to Stay

When I talk to friends in asset management, I often hear them express a deep, gnawing worry about low interest rates. Fears that low rates would spark inflation, or cause governments to default on their debt, seem to have receded. I don’t hear many people talk about a “bond bubble” anymore. But one big concern won’t go away -- the idea that low rates will cause financial instability.

The idea is that low rates encourage excessive risk-taking, in the financial world and possibly the business world as well. Awash in a sea of cheap money, asset managers will bid up the price of financial assets well above their sustainable values. They will reach for yield, funding overly risky projects in a desperate attempt to deliver returns that meet their investors’ high expectations. All of this will result in a crash -- stocks and real estate prices will plummet back to sustainable levels, and risky projects will fail en masse, leading to a recession.