So, what caused the economic and financial crisis of 2007-whenever? It’s an open question. Presumably we’ll continue to argue about it until the next crisis (or until the Moon Men invade.) But right now let’s talk about one possible story, or really family of stories: that the root cause of the crisis is that interest rates were too low for too long.
This is often taken to be a conservative view; one of its more prominent exponents has been John Taylor, who complained last week in in the Wall Street Journal that
the Fed has returned to its discretionary, unpredictable ways, and the results are not good. Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom.
Rortybomb’s favorite conservative Fed president Thomas Hoenig made a similar argument when he left the FOMC last year:
We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production. … If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy. In 2003, when we lowered rates and kept them there because unemployment was 6.5 percent — look at the consequences. Read more......