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Zero interest-rate policy (ZIRP), who played a key role during the Financial Crisis and Great Recession, died Wednesday afternoon December 16, 2015, in Washington, DC.  It was exactly 7 years old.

ZIRP’s death by assisted suicide was confirmed by Chair Janet Yellen in remarks after the December meeting of the Federal Open Market Committee of the Federal Reserve System.

ZIRP was born on December 16, 2008, 22 days after its twin Quantitative Easing.  It was conceived from the marriage between the monetary policy of the Federal Reserve and the fiscal policy between the president and Congress.  However, soon after ZIRP’s birth, fiscal policy became an absentee parent and was never to return during ZIRP’s lifetime.
It was an unconventional and desperate measure whose purpose in life was to stabilize and stimulate the U.S. economy after the subprime crisis and near economic collapse.

By reducing the interest rates of the federal funds rate to zero, the hope was that cheaper borrowing costs would lead to a strong recovery from the Financial Crisis.  Money would flow into riskier assets like stocks, real estate, and commodities.  This “wealth effect” would boost asset prices and therefore stimulate consumption and economic growth.

While controversial, ZIRP working together with its twin Quantitative Easing, generally have been credited with stabilizing the U.S. economy.  Instead of deflation and depression, U.S. GDP grew from -4.0% to 2.2%, unemployment shrunk 10% to 5%, and inflation has grown from -2.1% to 0.5%.
However, the economic recovery has been the weakest since World War II.  Average GDP growth since the start of the recovery has been a modest 2.2% compared to the 4.5% average from post-World War II recoveries.
The “wealth effect” impact has been questionable.  Funds did flow into the stock and fueled a bull market that is alive today.  Its impact on real estate has been mixed, as some markets have recovered while others have not.  But investments in commodities have produced an oversupply which has led to a collapse in prices.

Further, most Americans do not own stocks or real estate.  As a result, there has been a huge transfer of wealth from Main Street to Wall Street as these asset prices rose.  Consumption has not gone up commensurately and the economy has not grown to its potential.

Many believe that ZIRP’s upbringing in a single parent household had a negative impact on its effectiveness.  With fiscal policy being absent, the burden of the economic recovery rested solely on monetary policy and her two children, ZIRP and QE.  They were effective in short term measures but the economy was hindered in the long term by the lack of fiscal policy.
ZIRP is survived by monetary and fiscal policy.  Although unconfirmed, ZIRP may have had a bastard child called negative interest rates.

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