Asia Times: Zero interest rates, economic gloom

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Zero interest rates, economic gloom
By Hossein Askari and Noureddine Krichene


The first decade of the 21st century is likely to be remembered for lax monetary policy in major industrial countries, with interest rates at record lows and credit expansion at unprecedented highs, and for the worst financial crisis in the post-World War II period.

It will be remembered as a time when the financial system came close to a general bankruptcy that could have wiped out thousands of banks, but banks were saved at the cost of trillions of dollars to US and European taxpayers. The cost of bank bailouts and gigantic stimulus pushed fiscal deficits to record levels, and even in the aftermath of the turmoil, fiscal deficits are projected to remain above 10% of gross domestic product (GDP) for another decade in the United States, United Kingdom, and in
many other crisis-stricken countries. The financial crisis, in turn, fueled a deep economic crisis, with unemployment that exceeds 10% in most industrial countries.

How will governments cope with these deficits? Will they increase taxes? Will foreigners finance the rising debt of the US, UK, and other countries? So many uncertainties loom ahead. What can we learn from our mistakes?

During 2003-2004, the US federal funds rate was forced to 1% and kept at that level for about a year. Consequently, the benchmark London Interbank Offered Rate (LIBOR) hovered around 1% for about one year. Such low interest rates created a highly speculative environment, a world casino, in financial markets that ignited asset bubbles, and pushed credit mainly into subprime markets. ............(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/LA22Dj01.html

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