John McCain was widely lambasted for once saying in a debate: “I’m glad whenever they cut interest rates, I wish interest rates were zero.”
That one line exposed him as being totally ignorant on economics. What a buffoon.
Except that when you take a (slightly) closer look, this attitude is generally in keeping with the way a lot of politicians think. Interest rates are fiercely politicized, and the general thinking among politicians is: the lower the better.
Barney Frank was furious when Moody’s put all muni debt on negative watch. The “fix” or the housing mess involves the government pushing interest rates down artificially low. Established and startup auto companies are eligible for low-interest loans from the government. Students get subsidized low-interest loans, because education is deemed a societal good. The banks have raised money courtesy of the government intervening in interbank lending markets.
Oh, and did we mention housing already? Yes, but it’s worth repeating cause that’s how we got into this huge mess. Cheap loans to homeowners.
So McCain’s view, clearly, was conventional wisdom. His mistake, really, was just exposing the clownish simplicity of the way government likes to think of things.
So why are artificially low interest rates problematic? Well, everyone knows the obvious answer which is that without good market information, loans blow up in the lenders’ faces, and we get into crises such as the ones we have now.
But beyond the bad loans, artificially low interest rates lead to a lot of waste. Even if the housing bubble hadn’t caused such a financial calamity, you still have the problem of a lot of people wasting resources and effort building and swapping houses with no genuine economic benefit. All that money and human capital going towards something with such small contribution to society — it’s a tragedy in and of itself, even without the mortgage crisis.
It’s the same with lending money for student loans, or car loans, or the state of California. Without an accurate interest rate, there’s no reason not to just flush money and resources and human capital down the toilet. Nobody is telling you not to.