The rot caused by easy money will only become fully visible when the hollowed out institutions start collapsing under the weight of incompetence, debt and hubris.
We have yet to reach a full reckoning of the consequences of the era of easy money, but it’s abundantly clear that it ruined us. The damage was incremental at first, but the perverse incentives and distortions of easy money–zero-interest rate policy (ZIRP), credit available without limits to those who are more equal than others–accelerated the institutionalization of these toxic dynamics throughout the economy and society.
Fifteen long years later, the damage cannot be undone because the entire status quo is now dependent on the easy-money bubble for its survival. Should the bubbles inflated by easy money pop, the financial system and the economy will collapse into a putrid heap, undone by the perversions and distortions of endless easy money.
Easy money created destructive, mutually reinforcing distortions on multiple fronts. Let’s examine the primary ways easy money led to ruin.
1. The near-zero rate credit was distributed asymmetrically; only the wealthiest few had access to the open spigot of “free money.” The rest of us saw mortgage rates decline, but we were still paying much higher rates of interest than corporations, banks and financiers.
If we’d all been given the opportunity to borrow a couple million dollars at 1% and put the easy money into bonds yielding 2.5%, skimming a low-risk 1.5% for producing nothing, we’d have jumped on it. But that opportunity was only available to banks, the super-wealthy, corporations and financiers.
The charts below show the perverse consequences of offering the wealthiest few limitless money at near-zero rates while the rest of us paid much higher interest. The wealthiest few could buy income-producing assets on the cheap at carrying costs no ordinary investor could match…
…click on the above link to read the rest…