this post was submitted on 23 Jun 2023
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Economics
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This is like arguing, more people died in past wars, therefore we need war to be deadlier today.
If you're at war, then you do want war to be deadlier today -- for the enemy. The deadlier the war is for your opponent, the sooner the war will end in victory and you can stop fighting and go home.
In my view, excessive debt in the economy enabled in part by record low interest rates is the biggest threat we face at the moment. Artificially low interest rates created in part by central banks who support the world's wealthiest bankers using taxpayer dollars if they ever take a loss have varied effects. It makes the line go up, which is one reason why politicians of all stripes like it. It makes it more politically palatable to get deeper into debt -- A 32T federal debt would never be accepted by either side if bonds were at 1990 interest levels -- which politicians also like because they can buy more votes. It causes asset prices to artificially rise, which is great for people who own assets, but causes distortions in the market in a number of different ways, including massively transferring wealth from the poor and middle class to the rich.
I recognise that not everyone has the same point of view as me. Some people think lower interest rates are better for the poor, and there are viewpoints that access to cheap is critical for helping the poor and middle class accumulate wealth. Myself, I've seen the housing market in my home country shoot from reasonably affordable for most working class people to one city having a single family home cost $2M and another city having a single family home cost $1.4M, and the average price nationwide being around $800,000. According to the statistics, most of these houses are being purchased by regular people taking out loans, which is only possible because of massively distorted lending practices.
First, you don't necessarily want war to be more deadly, even for the enemy. Partly this is because you being more deadly will push them into being more deadly. You may also want diplomatic relations after the war. But more importantly, what you "want" in war has nothing to do with how many people are killed, but it'll be some other objective like territory or resources.
What you're talking about isn't war, it's genocide.
Anyway, there is no natural interbank rate, which means there is no artificial interbank rate. Interbank rates are arbitrarily set by central banks, so 0% is just as natural as 5% (which is to say, not at all). But this is kind of why I brought up the war analogy: Economics seems to encourage people to stop thinking about the world as it is, and instead engage in a sort of role-playing game, where napkin drawings are immutable facts and spreadsheets are dragons. So I don't generally like arguing about it, for the same reason I don't really like arguing about whether fighters are better than wizards.
People take a complex system, apply their political and ideological biases, and then just assert that good things are because of their ideology and bad things are because of other ideologies. Interbank rates are particularly fraught, since higher rates burden debtors and enrich creditors, and vice versa. People only focus on interbank rates because of a huge asshole named Milton Friedman, who somehow managed to convince people that interbank rates are the Right and Proper stabilization tool. He was wrong, but you know, economists are the perpetual johnnies-come-lately.
But the things you're talking about are failures of regulation, not inevitable consequences of a particular interbank rate.
We can go back and forth about the specifics of the act of using lethal violence to get what you want, but ultimately it's as Patton said: "No dumb bastard ever won a war by going out and dying for his country. He won it by making some other dumb bastard die for his country." -- The politicians might pretend they're not killing people to get what they want, but that's what war is. Anyway, an irrelevant tangent and you're mostly right on that point anyway if I'm being honest. :P
Realistically, I think you could make an argument that central banks are the wrong stabilization tool, and their existence, particularly as legal constructs that can conjure money into existence and buy assets as a buyer of last restort besides just being a lender of last resort. Hiding all the risk of lending by placing it in the taxpayer's hands (or in the general economy through inflation in the case of QE) means all debt will be cheaper than it should be.
There's a number of different factors in debt. Yes, higher interest rates can benefit lenders...sort of, sometimes... It depends, because it's a feedback system.
Right now, one of the reasons for all these bank failures is that the debt they hold is actually basically a money losing asset -- If you locked in for 30 years at 3%, right now your bank is basically giving you money for the privilege of you owing them the principal, since you got to borrow money that was worth much more and you're paying not that much money to pay back money that's worth much less. Because of that, in order to sell the debt you won't get as much as you expected for it.
Another factor is that having a lot of debt swinging around in the system raises asset prices. for this reason, the bank just lends more money and it all comes out in the wash for them. Meanwhile, institutional investors are usually savvier so they buy the assets at lower prices and get rid of them before the top, so it's often mom and pops holding the bag.
High interest rates keeping asset prices low is a boon for people who use money instead of debt to buy things. Interest only needs to be paid if you take out debt, so if assets are super expensive but interest rates are low, then you have no choice but to take out the debt and pay off a huge principal with little interest. Meanwhile, if asset prices are low but interest rates are high, then you can either save for the thing and buy it with cash, or put additional money on the principal over the course of the loan, eliminating the requirement to pay interest on the money you pay back.
There's another interesting side effect of super low interest rates that benefits the super-wealthy: debt is a great tax shelter. One way that the super rich get around paying taxes is to take out debt to spend instead of taking income or selling some of their assets. This way they get money (often secured with their assets) without having to pay tax since loans aren't income.
On a slightly different point, low interest rates also promote riskier investments, since people can't just lend their money and expect reasonable returns. This pushes people who should be on the shallow end of the risk curve way out in order to achieve acceptable returns. This has a number of different effects. One immediate effect is that if the risky assets suddenly crash then a lot of people who can't afford to get hurt are hurt. Next, it means that money ends up floating around in risky assets that aren't necessarily good assets. The rise of so-called "zombie corporations" demonstrate this, companies that aren't good but are relying on debt and investors who are looking for high risk investments, which locks up that money and makes it subject to a crash later, but also ties up people, property, and tools in something that isn't really optimal.
It's certainly complicated, and I'm presenting my point of view preferentially to all the other viewpoints out there, but that's the point of making my point. :P