Preparing for the Next Financial Crisis

Economic policies and nancial stability 269

in risk- taking behaviour. Accordingly, too low interest rates for too long may

encourage excessive leverage in risky assets, which puts nancial stability at risk.

Indeed, when the risk- free rate lowers, short- term liabilities–such as repos or

ABS commercial paper–become attractive money- like assets that can be used by

intermediaries to nance long- term risky positions. In turn, an increase in de-

mand for long- term risky assets lowers yields and spurs aggregate demand. How-

ever, in the event of a crisis, abrupt collective deleveraging by “re sales” to repay

short- term liabilities leads to severe nancial losses. In this regard, detractors of

LSAPs argue that they generate more risk