"That's the problem when there is way too much "dumb money" floating around to be invested for even the most minuscule returns - it will inevitably flow towards high-interest, high-risk stuff."

And that's by law: https://en.wikipedia.org/wiki/Gresham%27s_law

In an environment dominated by information asymmetry, the "bad investments" drive out the good ones. When we say, "dumb money," we're describing information asymmetry. The dumb money isn't as knowledgeable about the value of investments as the so-called "smart money."

But the net effect of a market being dominated by dumb money is that good investments either vanish, or get turned into bad investments to compete with the other bad investments for money.