It is argued that expansionary monetary policy of US Fed and other central banks and the resulting near zero interest rates have caused bubbles and bursts. The logic behind this argument is that near zero interest rate encourages borrowing by risk loving investors who use cheap funds to finance excessively risky projects. But once the economy gets back to normal condition, interest rates start rising and these risky investments increase systematic risk. Many financial institutions who take exposure to these projects during low rate regimes have concentrated risk that could lead to systemic risk.
Discuss your views on this issue, whether these arguments have any merit and if they do can you offer some suggestions that would mitigate this risk?
