​ECONOMICS OF LOW INTEREST RATES

A lot of today’s economic pundits and many politicians in the ruling dispensation are clamouring for low interest rates, which if history has anything to teach us, is suicidal. Pundits along with media are painting it as the panacea for all our economic woes, worst even attacking RBI governor for not doing so even after his repeated warnings about its ill effects. When central banks interest rates are lower than inflation, it will be uneconomical for banks hold reserve money. They will be forced to create assets even if projects are worthless. It will eventually leads to subprime lending which is very disastrous for the economy. We have two examples before us, one is 2008 financial crisis and the other is our own sort of crisis in present day banks.
Many of us believe that 2008 financial crisis is because of mortgage induced CDO’s (collateral debt obligation). But if we analyse real reason for creation of such worthless CDO’s is because of subprime lending and selling ratings for business by the ratings agency. The situation was induced because of Federal Reserve’s extremely low interest rates. Alan greenspan along with media successfully convinced the American people that it’s beneficial for their economy. We all know the woes of the crisis and the world economy is still in recession since then.

In India same kind of crisis sort happened with banks. The only reason banks woes didn’t snowball is because of increased bank regulations and public sector banks, although public sector banks created this crisis. During 2008-12 Repo rate was around 5-6% when inflation hovering about 9-12%. Because of this banks were forced to lend even if it’s subprime. This created huge NPAs which haunts the bank even today. In India even private banks don’t lend to private company as pointed in this economic survey. Banks provided huge loans to airline industries even though a child can tell that airline industry was in bad shape

The worst part of the both crisis is that govt spends large amounts in the name restructuring meant for the welfare schemes for the poor. Billions in Indian case, trillions in US’s case. People who are worst hit in these cases are poor and marginalised people. They are hit with reduced welfare spending and the inflation that accompanies these policies. Do you the worst part is?? The same people who are affected the most by the crisis being blamed by the media and the banking industry for the crisis; Homeless and immigrants in case of US, Farmers and students in India. While industrialists once again gamble with govt money spent on restructuring.

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