The increasingly expansionary monetary policies have two important negative side effects. First, productivity increases have become paralyzed, as low-return investment projects were encouraged during booms and are kept alive during recessions. Today zombie banks—which rely on the low-cost liquidity provision of central banks—prolong credits to unprofitable zombie enterprises to prevent bad loans from showing up in their balance sheets. The negative effect of such a hidden nationalization of banks and enterprises on productivity gains and growth are well described in Hayek’s (1944) Road to Serfdom.Second, there are adverse redistribution effects. As the liquidity issued by central banks is first transferred to financial institutions, they can profit first from fast-rising asset prices. Also, the wealth of rich grows, as they hold the major share of stocks and real estate. In contrast, the interest rate on the bank deposits of the middle class is nudged towards zero.The post is talking about the boom and bust. Too low interest rates support unprofitable enterprise and when rate subsequently rise, the zombie corporations go bust.
However the story is incomplete without the seigniorage stream. Generally the lower rates generates in seigniorage, and that pushes the widow sizes on loans and deposit way up, everyone goes banking on government loans. We end up with all the inflation in government prices. When raising rate, suddenly a bunch of government programs are unfundable and we shutdown.
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