Low interest rates didn't force VCs to invest this money. And it didn't force LPs to give the money to VCs. And obviously, startup founders weren't forced to take it. The various central banks played a role here, but definitely not a starring one.
One can debate whether "force" is the right word, but 100%, absolutely the goal of low interest rates was to force savers into riskier assets, when banks and bonds were returning close to 0. So many companies never would have funded in a normalized rate environment.
I agree that can be a consequence (although it isn't necessarily so; many people just leave their savings be), but I don't believe it ever was a goal.
And regardless, I think it's a big leap from "some savers wanted higher returns" to "let's throw a lot of money into things without due diligence or a coherent success story". Which unarguably happened lately. E.g., all the "smart" money invested in FTX, which we now know to be an absolute clown show. Other, better choices were possible. Including the supposed experts saying, "Sorry, we can't deploy this capital for you, as we don't think there are good opportunities in the current market conditions."
From the article: I(r) represents business investment decreasing as a function of the real interest rate
Businesses invest less as the rate increases. That's equivalent to businesses save less as the rate decreases.
“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.
As you may know, this statement was made after Powell famously reversed course on his 2018 unwind of Yellen’s put after asset prices started to fall.
https://www.hindustantimes.com/world-news/powell-busts-out-f...
What you have is at best an acknowledgement of a typical consequence of one kind of Fed intervention, but I don't think that's at all evidence of a goal.
They do this by suppressing interest because parked money loses value to inflation in such an environment.
In reality, the better solution is probably to raise taxes, but none of our politicians have the will.
During a recession, they decided that rather than lose some value to inflation, they wanted to risk losing all of their investment in hopes of a higher long-term return.
This is called a choice. They made it. Nobody owes them a guaranteed safe rate of return just because they're rich.
Realistically, an environment was purposefully created that would make the average actor move a certain way. Sure, the individual may have had the option to just eat the losses.
Returning to my original point, forest fires are about a natural phenomenon. Fire doesn't want anything and doesn't make choices.
But startup founders and venture capitalists and limited partners are all morally competent actors who get to make choices. No matter how much money is available, nobody is forced to put together a startup. Nobody is forced to invest in it regardless of its chances of success.
Language that makes their bad choices the fault of government or whomever is something that is very convenient for preserving their egos and keeping the game going. But it is not factually correct, and I am not obliged to swallow my objections to it just because some find it an uncomfortable truth.
3 : to make or cause especially through natural or logical necessity
"forced to admit my error"
8 : to induce (a particular bid or play by another player) in a card game by some conventional act, play, bid, or responseOr, to put it differently, some savers didn't want to pay the bank for holding their money and suffer 10% inflation. Of course that'll push them into funds and shares. Is it a goal? Possibly not, but it's a known and unavoidable side-effect, like having to poop at some point after you eat things.
As for the terms of investment being better for companies: that's just supply and demand. Everyone wants to invest their money, so the deals get worse.
> that's just supply and demand. Everyone wants to invest their money, so the deals get worse.
If people would rather lose money in a bad investment than due to overall inflation, that is a choice they can make. But that doesn't force the creation of bad investments. Some people create the bad companies, and others, ones who nominally should know better, put other people's money into them.
Since there isn't an unlimited amount of low-risk deals that you can bid on and pay more to be a part of, accepting higher risk is the only other option that still has a chance at being better than keeping the money in a bank and losing 10+% per year.
Other people make different choices. Which can be quite good ones! US inflation in 2022 was 6.5%, but the NASDAQ lost something like 30%.
Might VCs choose a spray-and-pray approach when money is abundant? Sure. Might LPs choose to give money to those VCs? Yes. But my point here is this is not mean old Jerome Powell ordering around robots or slaves or whatever. VCs can just not invest if there isn't something good. They can return the money or not take it.
Heck, even startups are not compelled to take the money. The last time I did one we eventually decided we had dug a dry hole, so we gave back the remainder of they money to investors. We were not compelled to spend it past the point we thought it was actually a good investment.
But we weren't in a recession when they made those investments, we had negative rates, 6-10% inflation and low unemployment in many countries (and certainly in the US). It's hard to argue that we're in a recession even now, since inflation is still high and unemployment is still low, these layoffs are publicized, but they're not moving the needle much.
> They can return the money or not take it.
What do investors do with the money instead? Yes, they can pass it on to the bank and have a 100% chance of the value going down 6-10% a year. How is that a choice, do pension funds just say "sorry, folks, we didn't see any good opportunities while the fed injected money, so your pensions will be 50% lower than expected"?
But yes, part of fiduciary duty is acting for the benefit of the person whose money you are holding. That obliges them to get the best return possible, no more and no less. If a lack of good opportunities means that the best actual return is a lower one than people hoped, that's the job. Because it's not like the people whose pension money went into FTX are going to do particularly well on the deal either.
In the US, we can only go by their stated goals, dual mandate from congress: keep inflation and unemployment low. https://www.stlouisfed.org/in-plain-english/the-fed-and-the-...
So what are the mechanisms that they can keep unemployment low (create jobs)? They lower interest rates, which causes people to sell assets that don't create jobs (treasury bills) and buy ones that do (corporate bonds, VC funds, etc) in attempt to get a return on capital (however, with more risk).
It's not some secret that lowering / raising interest rates affects all investors risk curve.
And although they are affecting incentives, people are not robotically obliged to follow them. VCs cannot be simultaneously such brilliant investors that they deserve to be wildly rich and also so without agency that a drop in the federal funds rate forces them to waste money on bad startups.
What a given central bank is up to depends on the central bank. But the Fed is pretty clear about its goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-...
I agree it's true that they change interest rates as a way of influencing investment rates as they pursue their goals. But I believe they have very interest in influencing the average individual saver in any particular direction, let alone having that as a goal. And I absolutely disagree that "force" and "encourage or discourage" mean the same thing.
My broad point here is that the Fed, using pretty blunt instruments, tries to keep us from both recession and inflation, but that does not "force" rich people to do anything. Those investing in startups have enough money that they have incredible agency in what they do with that money.
I can believe that VCs feel compelled to invest so they can keep up their reputations and their fat checks. But if so, they are compelled by prestige and greed, not by Jerome Powell.
Now sure, we can say that’s just the “dual mandate” at work, since they tie this concern to inflation. But still, I wouldn’t take a public statement like this as gospel.
I suppose it is true that no one person is forced to do anything, but if you create strong incentives to do one thing and disincentives to do another then I don’t think the difference is that meaningful in the aggregate.
And I'd say the difference is absolutely meaningful, because people have moral agency. People have "incentives" to do all sorts of harmful things. But we can still expect them to make good choices, and to own it when they make bad ones.
As an example, take FTX and Sam Bankman-Fried. He clearly had plenty of incentives to do what he did. That doesn't make what he did any less wrong. Indeed, morals that only applied when one had no incentive to act against them would be meaningless. It's exactly when the incentives favor harmful actions that morals most matter.
E.g., when interest rates drop, so do auto loan rates. But even if you can now suddenly afford a Hummer, you still get to decide whether or not that is a good choice for you. And if it turns out it wasn't, you don't get to blame the Federal Reserve for your choice.
The problem in a low interest environment is that parked cash loses value to inflation so it is forced to flow.
Cash isn't forced to do anything. It's not an actor here. People are. Those people make choices with their money. They choose more risk during a recession rather than a predictable loss.
Our question here is whether wealthy investors should invest their capital into VCs or interest-linked instruments. The whole point is that your analogy of the buying the Hummer is useless because a Hummer isn't an investment but an expense so there's no point in using your analogy.
My point is that easy money does not cause choices. People choose. Jerome Powell did not make anybody buy a Hummer, even if that was a predictable outcome of a drop in interest rates. Investment in bad startups may be a predictable outcome of easy money, but specific people still specifically chose those specific bad startups when they could have made better choices.