Sunday, 1 September 2013

That savings glut vs. those low interest rates

By David Howden

Five years after the worst financial crisis since the Great Depression, economists are still starkly divided as to its causes. Perhaps this is not too surprising as we are now more than 80 years past the Great Depression with little end in sight to the debate surrounding the causes of that downturn.

Most economists fall into one of two camps when explaining where the imbalances originated that led up to the current crisis. Austrian School economists are in the unique position of being able to reconcile these two camps, even while favoring the first explanation to the second.

The first camp, which includes most Austrian School economists, looks at the imbalances caused by central bank interest rate policy being set “too low for too long.” In this view, artificially low interest rates allowed for erroneous capital investments following the dot-com bust of 2001, and continuing to the present time.

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