Decades of low-interest rate policy by central banks distorted economy. 2007-2008 financial crisis happened due to artificially low interest rates and cheap money. Failures of several banks recently were also due to that irresponsible policy.
Henry Hazlitt in his excellent "Economics in One Lesson" wrote the passage below about 50 years ago. Now when you read it in the light of recent events these words make even more sense.
This whole subject has been so appallingly confused in recent years by complicated sophistries and disastrous governmental policies based upon them that one almost despairs of getting back to common sense and sanity about it.
There is a psychopathic fear of “excessive” interest rates. It is argued that if interest rates are too high it will not be profitable for industry to borrow and invest in new plants and machines.
This argument has been so effective that governments everywhere in recent decades have pursued artificial “cheap money” policies. But the argument, in its concern with increasing the demand for capital, overlooks the effect of these policies on the supply of capital.
It is one more example of the fallacy of looking at the effects of a policy only on one group and forgetting the effects on another.
The effect of keeping interest rates artificially low, in fact, is eventually the same as that of keeping any other price below the natural market. It increases demand and reduces supply. It increases the demand for capital and reduces the supply of real capital.
It brings about a scarcity. It creates economic distortions. It is true, no doubt, that an artificial reduction in the interest rate encourages increased borrowing.
It tends, in fact, to encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth. On the supply side, the artificial reduction of interest rates discourages normal thrift and saving.
It brings about a comparative shortage of real capital.
