Low Interest Rates: The Cause of the Financial Crisis?

Like many investors, I've been thinking for quite awhile about what ultimately has caused the current financial crisis.

My answer: Artificially Low Interest Rates by the Fed which led directly to overspeculation in housing, commodities, and nearly every other asset class.

Quite simply, artificially low interest rates by the Fed, and especially an interest rate of 0%, as is currently the case, is very detrimental to a normally functioning stock market. As long as the Fed maintains the policy of low interest rates, the stock market will never recover in a meaningful way and financial markets will remain depressed with short bear market rallies. This is what has happened in Japan and there is absolutely no reason to suspect that the US will fare differently.

Artificially low interest rates are detrimental because:

• They completely cut off any sort of risk-free income for the prudent saving class, who remain the only true holders of wealth in the economy. Without risk-free income, how are savers expected to live off of savings? How can they spend if their passive income is cut to zero? What incentive is there to even save?
• Artificially low interest rates make it impossible to value stocks, and other financial assets, since there is no yardstick for determining a risk-free rate for discounting purposes. In fact, artificially low interest rates, when taken to their extreme logical conclusion, suggest obscene, even infinite, multiples for stocks.

So if artificially low interest rates make no sense, why does the Fed do it?

Other than the fact that the Fed lacks any creativity to actual implement solutions to the financial crisis, lowering interest rates serves primarily one purpose:

By keeping interest rates artificially low the Fed hopes to trick the saving class into seeking higher returns on their capital and thereby cause a shift in capital to risky assets, like stocks. As such, the Fed is trying to stimulate speculation and gambling by keeping interest rates very low. By triggering speculation in assets, the Fed hopes to achieve asset inflation, without which the entire modern banking system, which is based on credit expansion fueled by asset inflation, must collapse.

This trick has worked well in the past, and led to the massive speculation in housing and other asset classes that ultimately led to this financial crisis.

But, will prudent savers, in search of risk-free income, be tricked into speculating in various asset classes once again? It's doubtful. It's more likely that savers have learned their lesson and they will hoard their cash until the Fed recognizes that if they want the economy to begin growing again, they must raise interest rates so that savers can generate risk-free income and at the same time have some sort of rational framework to use when evaluating riskier asset classes.