Monday, September 26, 2016

Excellent 2008 financial crisis explanation

I admit I am worried about a potential meltdown happening in the not-too-distant future thanks to low interest rates.

As this video explains, at minute 6:30, the motivating force behind the risky lending that created the 2008 financial crisis was the desire for investors to get a better interest rate on their investments than 1% which is what they can get for investing in Treasury Bills.

Thanks to my recently watching Krugman videos, I'm aware that not only are investment rates low, but Krugman believes that they will remain low for a long time, thanks to aging populations and lower overall rates of investments.

Krugman talks about this at his recent 92 St. Y presentation and points out that 80% of Americans aren't living on the interest of their savings, and older Americans are living on Social Security. But of course it's the people who do have enough savings, so much that they do get a significant portion of their income from interest rate payouts who will drive the next crisis. In addition to pushing the Fed to raise interest rates, they will also be looking for ways to make riskier investments, which pay out a better interest rate. As Krugman noted:
What is the role of interest in this world? Interest, classically (and I do mean classically, as in Mr. Keynes and the), is the reward for waiting: there’s supposedly a social function to interest because it rewards people for saving rather than spending. But right now we’re awash in excess savings with nowhere to go, and the marginal social value of a dollar of savings is negative. So real interest rates should be negative too, if they’re supposed to reflect social payoffs.
This really isn’t at all exotic — but obviously it’s a point wealth-owners don’t want to hear. Hence the constant agitation for monetary tightening.

The video was created by Jonathan Jarvis. Who also has a Twitter account.