When Janet Yellen, Chairman of the US Federal Reserve, said in June that she does not expect another financial crisis in our lifetime, eyebrows were raised.

None more so than Richard Sylla’s.

Sylla, a professor emeritus at the Stern School of Business and co-author with Sydney Homer of the magisterial A History of Interest Rates, has studied past business cycles. He is thus able to put today’s events in a broader context. 

“A lot of the same things are going on right now as before the 2008 crisis,” said Sylla, who puts the probability of a repeat, in our lifetimes, at between 70% and 80%.

“People figure that central banks avoided a Great Depression last time and can do it again,” said Sylla. “So they are not worried.”

The most important price in the economy

Sylla’s work is particularly important because interest rates, which have a direct influence on all economic activity, are simply the most important prices in the economy.

For example, the average American who bought a $250,000 home and financed it for 30 years at 3.83%, would pay just over $175,000 interest during that time. That’s almost as much as the cost of the house itself.

Interest rate levels also affect the real prices of cars, as well as all other consumer, business and government purchases – hence the ever-present temptation among policy-makers to keep rates low.

US Treasuries: yields at least 8% in a free market?

History provides a hint of the scale of the Fed’s current interventions, which could be depressing interest rates by at least 5.0 percentage points across the yield curve. The result is the transfer of trillions of dollars a year from American savers to borrowers.

As Sylla and Homer note in A History of Interest Rates, British Consuls’ perpetual bonds yielded between 2.5% and 3% during much of the 100+ years that the British Empire was at its peak.

Their long duration, during a time when currency was backed by gold, provide a suggestion of where natural interests rates would be in a free market environment.