How is the Fed to be blamed if financial institutions are reckless and greedy during periods of low interest rates?

BY Paul Solman  December 14, 2007 at 4:01 PM EDT

Question/Comment: Many commentators have blamed the Fed for the mortgage mess. How is the Fed to be blamed if financial institutions are reckless and greedy during periods of low interest rates?

Paul Solman: You’re cheating, Lloyd. This is two e-mails in a row. But good questions deserve answers.

The Fed is blamed because it kept interest rates low. That enabled financial institutions to be more reckless than if the cost of money had been high. In general, cheaper money means more loans, which then means looser terms. (“Greedy” is a loaded term, and has no more to do with the current situation than it did with the advent of Donkey Kong or the fall of Enron.)