This is a very good article. Low interest rates also make it difficult to have competition in banking, because interest has to cover the defaults and the costs of doing business, as well as any profits. If there are a lot of insolvent zombie corporations around, a new bank won’t be able to make a profit lending to them at low interest rates, and so only the too-big-to-fail banks continue in business with an unstated government guarantee that they’ll force someone else to bail them out when the insolvency is revealed. Jim Grant points out that the Fed raised interest rates in 1920 as the economy was going into a recession. It was deep, but it was over within a year because all of the insolvency was exposed and written off. Keeping zombie corporations alive just draws out the pain because people think that holding on long enough might mean that someone else ends up taking the losses which have already happened.
This is a very good article. Low interest rates also make it difficult to have competition in banking, because interest has to cover the defaults and the costs of doing business, as well as any profits. If there are a lot of insolvent zombie corporations around, a new bank won’t be able to make a profit lending to them at low interest rates, and so only the too-big-to-fail banks continue in business with an unstated government guarantee that they’ll force someone else to bail them out when the insolvency is revealed.
Jim Grant points out that the Fed raised interest rates in 1920 as the economy was going into a recession. It was deep, but it was over within a year because all of the insolvency was exposed and written off. Keeping zombie corporations alive just draws out the pain because people think that holding on long enough might mean that someone else ends up taking the losses which have already happened.