Why would there be bewilderment? Interest rates are, of course, the cost of money. We saw the cost of money fall to essentially nothing because the demand for money dropped off a cliff. As with anything, the price then fell to compensate. That's your basic supply and demand.
But why would the market no longer have a strong demand for money and see money as being essentially worthless? Because nobody knew what to do with it. That's why we got little out of ZIRP. ZIRP was merely a symptom of the populace not having a strong vision or direction in which to use resources. It was in reaction to the environment it took place in.
Had we had loftier goals and grander visions we'd have gotten more, but the cost would have also been much higher (i.e. ZIRP wouldn't have happened).
ZIRP happened as a long-term back-channel bailout to all the banks & funds holding the downside of the housing & derivatives market collapse. It allowed the financial sector to reinflate several asset classes that should have seen steeeeeeep declines & corrections, so that they didn't have to face insolvency.
Then on the back of that there were all these knock-on effects to cheap money, or more specifically net-negative yield on things that historically were supposed to be slow, safe value stores. One of which was epic amounts of money flooding into VC and VC making the attribution error of their access to money being correlated to their access to ability & insight, but in the prevailing environment there was no correcting feedback function for that either.
So, cheap-money became dumb-money, but sociologically we attribute lots-of-money to intelligence & capability, and from that a decade of Hundreds of Billions of Dollars of trite visionless total crap was born.
> ZIRP happened as a long-term back-channel bailout to all the banks & funds holding the downside of the housing & derivatives market collapse.
ZIRP happened because the US unemployment rate went to 10%, and when that happens central banks tend to drop rates to help the economy get going again:
That was on the monetary side. On the fiscal side, the GOP refused to pass a large enough stimulus package—what was sent through had a large portion (40%) of tax cuts to win bipartisan support, and those, as predicted, didn't do much. So, as can see in the above graph, it was a long slog to get people employed again.
And since the fiscal side didn't do anything (thanks GOP), the Fed had to enact its mandate to fulfil employment, and since rates were already at zero, other measures were done. This is where QE came in, which many (right-leaning) folks said would cause disaster:
> We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
The Keynesians said this was non-sense. The Keynesians were right (again).
And so the long grind to restore employment numbers (while watching inflation) continued for the entirety of the time Obama was in office because the GOP didn't want to help on the fiscal side. And so that left the monetary side and ZIRP and QE.
So if you don't want long-term ZIRP on the monetary side, perhaps the fiscal folks should do their jobs.
> in the prevailing environment there was no correcting feedback function for that either.
Right. The correcting function should have been everyone else noticing that they could borrow for essentially nothing and use that to fund their grand visions. The increase in demand would have necessitated an increase in interest rates to slow activity. Just as eventually happened when people finally felt they could do something with money (i.e. expansion in economic sectors where supply shocks suggested [no doubt incorrectly – but that will be another problem for another day] that increased production was needed).
It didn't happen because the vision was lacking. What was anyone going to do with it? Nobody knew what to do it. As such, nobody was borrowing in any meaningful way. At best they borrowed to buy houses, but certainly not for productive activities. Those with money didn't know what to do with it either. Lending it to those who had a vision wasn't an option. So, they simply plowed it into whatever was fashionable. And as a result, we didn't get much more than fashion in return.
We gained a vision around correcting the supply shocks that occurred in the early 2020s. The price of many goods went sky high due to lack of supply, so people started demanding money again so that they could ramp up production in response. Thus the price of money (i.e. interest rates) increased on that newfound demand.
You are right that it is probably not a suitable long-term vision. In fact, it seems most everyone is convinced that interest rates are going to head back towards ZIRP again soon because they don't see any long-term vision out there to sustain that demand. You are good company here.
But why would the market no longer have a strong demand for money and see money as being essentially worthless? Because nobody knew what to do with it. That's why we got little out of ZIRP. ZIRP was merely a symptom of the populace not having a strong vision or direction in which to use resources. It was in reaction to the environment it took place in.
Had we had loftier goals and grander visions we'd have gotten more, but the cost would have also been much higher (i.e. ZIRP wouldn't have happened).