The safety trap
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...