39. Capital Structure and Financial Stability

Another important aspect of the problem is that the re-structuring of industry on the European level has important implications for financial stability. Artificially low interest rates created a “bubble” in the durables sector which, when exploded, brought the American and European economies through the most deep recession since 1929. The very idea that interest rates are policy variables that can be changed at will, due to the belief that there is a negative relationship with “aggregate investment” and “aggregate demand”, should be abandoned in the interest of international financial stability. The markets operate on a global level not only through real variables but also through various contracts and agreements in the financial markets. Trading of these contracts is extremely easy and anticipates the low turnover of various resources and factors of production, including capital. The underlying forces that led to the sub-prime crisis were in effect long before and the crisis came as a natural outcome of processes that were operating under the influence of movements in relative prices and rates of interest along with rates of profit.