The Safety Trap
Lack of secure investments is hindering growth globally, research finds

 “Policies that increase the net supply of safe assets somewhere are output-enhancing everywhere.”

— Ricardo Caballero, MIT Ford International chair of Economics

Unless you’ve been following the subject closely, you may not have heard of one of the biggest barriers slowing the revival of global economic growth over the last decade. That would be the “safety trap,” a problem arising from a lack of low-risk investments around the world.

To see the problem, recall that after the financial-sector crisis in 2007 and 2008, a large portion of investments people had considered safe — mortgage-backed securities come to mind — were suddenly understood to be risky. And yet, the ensuing flight to safe assets, such as U.S. debt, has come with its own cost. The increased demand for these safer investments keeps interest rates at low levels, to the point where central bankers cannot spur additional economic output by further lowering those rates. This is the “trap” part of the safety trap.

In recently published research, MIT economist Ricardo Caballero and two colleagues have described in new detail how the safety trap works. The paper also highlights a subtle policy implication: The lack of safe assets is a consummately international problem, but the resulting safety trap itself can be remedied by policy initiatives from individual countries.

Read the full story at MIT News

Find more SHASS Social Innovation stories