Interest Rates, Venture Capital, and Financial Stability

Journal

University of Illinois Law Review

Issue

1699

Abstract

As central banks tightened interest rates during 2022 and 2023, important debates arose regarding the relationship between monetary policy and financial stability. This Article illuminates one path through which the prolonged period of accommodative monetary policy from 2009-2021 impacted financial stability: it traces how easy money and yield-seeking behavior in the wake of the Global Financial Crisis and COVID-19 pandemic led to a bubble in the venture capital industry, which in turn spawned a crypto bubble as well as a run on the VC-favored Silicon Valley Bank. This Article uses this account to illustrate the importance of proactive financial regulation both in preventing the financial crises that invite more accommodative monetary policy and in preventing accommodative monetary policy from sowing the seeds of future financial stability problems when it is deployed.
This Article is primarily a descriptive account, designed to highlight the venture capital industry's unexpected and underappreciated contribution to financial stability threats in the early 2020s. This Article does, however, suggest several policy implications of this account. It recommends increased monitoring of the venture capital industry by financial stability regulators, given that venture capital is well-positioned to generate asset bubbles now and in the future. It also argues for more aggressive enforcement of the securities laws to tamp down on the present crypto bubble, as well as for structural separation between crypto and the traditional financial system. More generally, this Article urges financial stability regulators to be vigilant during periods of accommodative monetary policy.

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