Henri Schneider writes: Truisms and banalities: Investors must be able to assess the productivity of their capital. This is done by comparing returns to interest rates. But what, if all interest rates are rigged? What if they are artificially lower than they should be? Then, not only too much capital is invested, but it is invested in the wrong places. Even more pressing: what if there is simply too much capital in the financial system?

For sure, financial markets are up, investors are happy, politicians – central bankers just being a peculiar type of politicians – enjoy the merriment. But the population of question marks regarding the actual cycle is also increasing.

Is there real investment appetite in financial markets or is the upward trend a function of cheap central-bank money? Is a bull-cycle of roughly 7-years the fruit of higher productivity or a result of central-banks unwillingness to raise interest-rates? Is it the nature of development that tech assets and internet companies have higher valuations than those firms that produce stuff an employ people?

For sure, all these question marks have always been there. And they will always be. But keep in mind that in the cycle before the 2007-09 crisis, a similar discussion took place. Low interest rates that remained for an overly long period of time; cheap money created and circulated by central banks; and the built-up of capital in asset classes that turned out to not to be the ones that mattered – these were all features of the 2000s bull-cycle.

Back then, no person of sane mind would question the pace of globalization. No one would dare putting a question mark behind housing. Not even the craziest would contest the financial engineers’ ability to build products. Even the diehard atheists were convinced of the god-likeliness of the Chairman (of the Fed, that is).

Today, many of the same question marks remain but can be applied to different trends, sectors and skills. The trouble is twofold. First, there is too much capital in the system. The more capital there is and the more this capital deviates from the natural investment stock, the harder is the landing. Once market-agents realize that they were valuating a capital stock much higher than the real demand for that stock is, its value implodes – crisis. Second, the more this capital-stock deviates from the natural preference for capital or assets, the longer it takes to correct this misallocation – long crisis.

Granted: The “natural” investment stock and the “natural” preference for assets seem difficult to find out. But “natural” means nothing more than what market agents would do if there weren’t interventions from central bankers pouring money into the system and lowering interest-rates. “Natural” is only what agents would do if they were to choose freely, invest per their own risk-budgets and with their own money. All of these three are currently hindered by monetary policies.

Truisms and banalities? Of course. When investors use their own money, act per their individual risk-budges and choose freely, the risk of financial crises is considerably lower. Even if they hit, markets can shake off the effects of by themselves quickly. However, the next crisis is born when central banks meddle either by keeping interest rates low or by creating too much capital. Both of them being done right now.

Henrique Schneider is the chief economist of the Swiss Federation of Small and Medium Enterprises and board member in different funds and asset managers.

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