Market set interest rates?

[Griffith]

What would cause the interest rate to go higher if it was set by the market? If the money supply were increased 2x would that cause the interest rate to go higher or lower?

[llepard]

What would cause the interest rate to go higher if it was set by the market? If the money supply were increased 2x would that cause the interest rate to go higher or lower?

Great question. The market for interest rates is completely rigged. Read my Q3 report for explanation.

[emazur]

What would cause the interest rate to go higher if it was set by the market? If the money supply were increased 2x would that cause the interest rate to go higher or lower?

Interest rates would go up as more people are demanding to borrow money. That's why the housing bubble never would have happened if free markets set interests rates. At artificially low rates at 1% there is a mad dash to borrow and a mad dash to buy, and as demand for homes (and the ability to finance them) goes up and supply of homes can't keep up w/ demand, prices soar. Let's just suppose back in 20001 the free market had interest rates at 1% naturally. If floods of people started demanding homes, interest rates would have climbed up (b/c there is a finite supply of money in a free market where the fed doesn't "inject liquidity") and up to the point (maybe 10%?) where people would have said 'screw it, I'm not buying', and then the demand for homes and interest rates would have automatically adjusted downward.

[mojobo]

What would cause the interest rate to go higher if it was set by the market? If the money supply were increased 2x would that cause the interest rate to go higher or lower?

Interest is the price paid to use money. Just like any other price it is based on supply and demand. For example technology for computers has allowed for more and more computers to hit the market driving down the price relative to dollars. Greater supply = lower price. Technically interest rates are still market set, but there is an artificial supplier of dollars (the FED). When they want the market to lower interest rates they go out and sell dollars they create through loans creating a greater artificial supply. So if the money supply were to double (holding all other factors constant) the interest rate would go down.

[Becker]

Great question. The market for interest rates is completely rigged. Read my Q3 report for explanation.

is it any secret though? the fed sets an interest rate they lend to top banks, and the banks follow, is there any law that says they can't lose money or risk money in giving higher interest? No. But they don't have the power to print or issue new money, so what's wrong with having a rigged interest rate if it means banks cannot arbitrarily set rates without accountability?

what would happen if people are happy to pay a high interest rate ? We already have it, its called credit cards, student loans, and high interest loan sharking. There's also peer-to-peer lending.

[nobody's_hero]

Someone else hit on it. Interest rates in a free market would be set according to current capital held in savings—not the amount of existing debt.

The kicker is that the U.S. dollar is debt, so it can get kind of confusing if you think about it too hard.