Will next time be different?

Democracy tends to institutionalize moral hazard in sectors that are economically or politically important, such as finance or real estate, allowing them to privatize gains and socialize losses. But this does not mean that policymakers must repeat the same mistakes every time such sectors get into trouble. For example, the US Federal Reserve has essentially guaranteed the financial sector that if it gets into trouble, ultra-low interest rates will be maintained (at the expense of savers) until the sector recovers. In the early to mid-1990’s, rates were kept low because of banks’ real-estate problems. They were slashed again in 2001 and kept ultra-low after the dot-com bust. And they have been ultra-low since 2008. Senior Fed policymakers deny that their interest-rate policy bears any responsibility for risk taking, but there is much evidence to the contrary. Read the complete opinion piece of Raghuram Rajan (University of Chicago) for Project Syndicate here.