Mike Konczal writes: “Two Simple Reasons to Not Fight Bubbles with Higher Interest Rates”:
I had no idea that Sweden has gone all-in on raising interest rates to fight “financial instability.” (Alas poor Lars Svensson!) Simon Wren-Lewis has details, Krugman has more, and Peter Orszag had a great columnabout how New Zealand is instead using regulations to fight worries about the financial system.
I’ve been long fascinated by this topic. The stakes are very high: should we endure a mini-recession, with lower employment and output, to fight a thing called “financial instability”?
It shouldn’t be clear to a random person which of these [transmission channels] would dominate over the other, thus making me believe that raising interest rates would likely be a wash in terms of financial stability. But it would definitely move us further away from full employment and price stability.
Now if I had to put money on it, I know that the risk channels can be tackled through financial regulation, while I believe the idea that running a larger output gap, with weaker incomes and more unemployment than necessary, will somehow fix consumer balance-sheets is borderline insane.
So why are so many countries going this way? Does capital just have an inherent right to a certain level of return regardless of mass suffering?