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Thread: What does artificially lowering/raising interest rates do to societies wealth

  1. #1

    What does artificially lowering/raising interest rates do to societies wealth

    well?



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  3. #2
    My understanding is that by not allowing the free market to determine interest rates it causes malinvestment which destroys society's wealth. Keeping interest rates too low, for too long, allows the big banks and corporations to receive the "cheap money" first, while the middle class gets the short end of the stick by having to pay the "inflation tax."

    Conversely, I believe artificial interest rates that are too high causes the malinvestment by having everyone pile into the currency all at once, when the excess capital could be used in more productive capacities if the market was allowed to decide the rates.
    Last edited by AmericasLastHope; 06-23-2010 at 02:13 PM.
    "A free people ought not only to be armed and disciplined, but they should have sufficient arms and ammunition to maintain a status of independence from any who might attempt to abuse them, which would include their own government." George Washington

  4. #3
    Interest rates are the signal to the market how much stored capital is available for investment in future projects (such as a house). When rates are high, it means that there is not as much capital currently so large projects should not be begun. When rates are low, it means that there is plenty of available capital so it's a good time to start using it. When these rates are modified artificially, more projects are begun than there is capital available, and a number of these projects will fail because there aren't enough real resources or demand.

  5. #4
    oh ok, I think I get it. It's kinda like lieing and then people screwing themselves over based on the lie.
    Last edited by TheAnswerTo1984is1776; 06-23-2010 at 02:41 PM.

  6. #5
    It creates Moral Hazard. Also money is a "good" just like any other good. No one agency should set the price of it just like no one should set the price of candy.

  7. #6
    Quote Originally Posted by AmericasLastHope View Post
    My understanding is that by not allowing the free market to determine interest rates it causes malinvestment which destroys society's wealth. Keeping interest rates too low, for too long, allows the big banks and corporations to receive the "cheap money" first, while the middle class gets the short end of the stick by having to pay the "inflation tax."

    Conversely, I believe artificial interest rates that are too high causes the malinvestment by having everyone pile into the currency all at once, when the excess capital could be used in more productive capacities if the market was allowed to decide the rates.
    Exactly and for someone who is completely new to this, let me quickly explain what is meant by "malinvestment". Entrepreneurs' actions are often determined by the costs of lending (interest rates) - when the costs of lending are very low in a free market, that would indicate that there are a lot of savings (many people save money and give it to banks to lend means higher supply of money to lend means lower prices on lending -> lower interest rates). High savings indicate both a large "resource pool" (after all, savings have to be earned by producing and maintained by not having consumed those products) and low current demand (if demand was not low, people would spend their money and not save it).

    That interest rates under those conditions are low is a good thing because Entrepreneurs will under low interest rates tend to start long time projects (since the price of lending is lower, they can afford to take out more long-term loans). This compliments both the large resource pool that should be utilized somehow (after all, if current demand is low, retail jobs, trucking jobs, etc will be lost) and the higher future demand that people indicate by saving more (because they usually plan to spend their savings at a later point of time on future products) can be satisfied if through long-term projects a high amount of consumer goods in the future will be produced.

    However, if interest rates are suppressed by a central bank artificially, Entrepreneurs will engage in long-term projects even though consumers didn't save and current demand didn't fall. This means that many long-term projects will be started even though the resource pool is not big enough to allow for all of them to be finished (malinvestment - resources will be squandered in those projects that will have to be abandoned before completion).

    Here is how this would usually go about: Those long-term projects representing future demand will have to compete with current demand which means costs for trucks, workers, etc will rise (because, after all, both retailers AND long-term projects will require those resources at the same time) and the Entrepreneurs that have started those long-term projects will have to go deeper into debt to pay for the resources (of which the prices are rising due to higher demand) they require.

    Eventually many of them will have to go bankrupt because they are not able to cope with ever rising prices, production lines collapse and as prices begin to fall due to lower demand by investors and Entrepreneurs who have been put out of business or fear doing so by engaging in investment in stocks, etc. So, after that inflationary period of suppressed interest rates a deflationary period with higher interest rates has to follow (as demand for cash will rise and people will be wary of giving out loans).

    However, if the central bank wants, they can just keep printing up more and more money, pass it out to consumers and if those are unwilling to spend, ultimately have the government spend it, to prevent deflation. What will then follow is a strong inflation ultimately ending in hyperinflation of the central bank does not cease the printing of more money.

    I wrote this in kind of a haste, but still hope it gets my point across rather well. If I left out something or made an error or something's unclear, please point that out to me.

  8. #7
    it creates lots of broken windows.

    see "Broken window fallacy"

    When there's artificially more or less money, people have opportunities they normally didn't have to make money, creating an illusion of production, which could later be "robbed" of them when the manipulation stops (or backfires).

    Sticking to the broken windows. If suddenly lots of windows were broken, people who make, install windows would benefit, if they thought it'd keep happening, they'd invest more money in it. Eventually when windows stop breaking, they'll be a storage of useless glass.

    The same is true if the opposite happens, that suddenly an increase in windows, that may increase the sale of balls to break them, or entertainment shows that use broken windows, but as soon as the supply is used up, if nobody prepared for the increasing demand of windows, the economy is devastated again.

    Though it's just coming out that "long term unemployment is at historical high"
    http://news.yahoo.com/s/ap/20100605/...erm_unemployed

    the fact is, it's LONG overdue. At least a conservative 10 years.

    Think about how many "jobs" have literally been CREATED AND PROPPED UP by fake money.

  9. #8
    How do you know if rates are "artificially low" or "too high"? How are interest rated determined? The Federal Reserve sets one interest rate- that is the rate at which banks can borrow money from them. These are extremely short term loans- usually only overnight to help a bank balance its books for the day (reserves against outstanding loans have to be within a certain ratio). While some things which charge interest rates can take a clue from that rate, they are free to not follow those rates. Another major interest rate benchmark are Treasury note interest rates (there are different maturities on Treasury notes so they usually have different interest rates). Things like mortgage rates and sometimes car loans are based on Treasury rates.

    How are those rates set? Not by the government but the market. The Treasury decides how much money they need to raise for a given issue and then they have an auction. Investors (such as banks or investment firms or pension funds for example) make an offer for how many they are willing to buy and at what price (Treasury notes have a face value and sell at a "discount" to that value. When they mature, they are worth the full face value and the difference between the face value and the selling price determines the rate of return or yield on the bonds). The Treasuries are sold at the highest price which will sell the entire issue. This means that treasury rates (and any rates linked to them) are determined by the market- not the government or the Fed.

    Interest rates have three basic components- the first is the desired rate of return by the lender. If I am going to lend out money, I want an incentive to do so- otherwise I can spend or invest the money myself. The second component is the expected rate of inflation. If expected rates of inflation during the time of the loan are low, then interest rates will be lower. Today we are in a low inflation period so low interest rates are not unusual and even to be expected. If inflation is high, then interest rates will be high. Some have claimed that interest rates were too low during the housing boom but we also had low inflation so there was no real reason to have high interest rates. The third component of an interest rate is borrower risk premium. If it is highly likely that you are going to be able to pay me back the money I lent to you then I am willing to acccept a lower risk premium. If you are a bit more shaky in your financial situation, I will demand a higher premium to be willing to loan you the money.



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  11. #9
    Quote Originally Posted by Zippyjuan View Post
    How do you know if rates are "artificially low" or "too high"?
    The same as everything, by comparison.

    You might not always know right away.

    How are interest rated determined? The Federal Reserve sets one interest rate- that is the rate at which banks can borrow money from them. These are extremely short term loans- usually only overnight to help a bank balance its books for the day (reserves against outstanding loans have to be within a certain ratio). While some things which charge interest rates can take a clue from that rate, they are free to not follow those rates. Another major interest rate benchmark are Treasury note interest rates (there are different maturities on Treasury notes so they usually have different interest rates). Things like mortgage rates and sometimes car loans are based on Treasury rates.

    How are those rates set? Not by the government but the market.
    Not entirely true.

    Interest rates SHOULD be set by the market, but the government, or banks, may still act in their own decision (which is by definition arbitrary and artificial)

  12. #10
    Quote Originally Posted by WaltM View Post
    The same as everything, by comparison.

    You might not always know right away.



    Not entirely true.

    Interest rates SHOULD be set by the market, but the government, or banks, may still act in their own decision (which is by definition arbitrary and artificial)
    SO which interest rates are the government setting and what makes them too low or high? Banks are part of the market since they are the primary source of lending.
    Last edited by Zippyjuan; 06-24-2010 at 02:32 PM.

  13. #11

    Exclamation

    Quote Originally Posted by Zippyjuan View Post
    SO which interest rates are the government setting and what makes them too low or high? Banks are part of the market.
    the market needs to determine interest rates, just like the market needs to determine the price for a single apple; currently, we don't have this; the Fed can inflate or deflate at whatever whim it wants, which directly changes the interest rate; it can do this by changing the discount window rate and the federal funds rate, which, as you know, is the interest rate that banks charge each other for funds--these policies change how much money is in circulation, and thus, it directly impacts the interest rate.

    YouTube - Austrian Theory of the Trade Cycle | Roger W. Garrison this is a great video describing the trade cycle
    YouTube - Gold is Free Market Money | Walter Block another good one that is a bit shorter

    there's also an excellent PDF entitle "Empirical Evidence on the Austrian Business Cycle Theory" as well--I have it, but I can't seem to find it in downloadable format anymore...the last place I found it was here: http://www.gmu.edu/depts/rae/archive...1/5_keeler.pdf and that doesn't seem to work.

  14. #12
    Hazlitt had a good analogy with regard to prices in a private enterprise system. The interest rate is a price just like any other, and should be set by the market.

    "Most of us must have noticed the automatic 'governor' on a steam engine. It usually constists of two balls or weights which work by centrifugal force. As the speed of the engine increases, these balls fly away from the rod to which they are attached and so automatically narrow or close off a throttle valve which regulates the intake of steam and thus slows down the engine. If the engine goes too slowly, on the other hand, the balls drop, widen the throttle valve, and increase the engine's speed. Thus every departure from the desired speed itself sets in motion the forces that tend to correct that departure." H Hazlitt


    Libertarianfromgermany pretty much hit the nailed it on the head. High savings = low interest. Low savings = high interest. When one manipulates the rate, which the Fed does, they in essence, take the "governor" off of the engine.

    I would also add to what libertarianfromgermany said in that when the rate is held too low for too long (after true savings are depleted) the Fed must keep adding "credit" to the banks to fund the loans...ie "printing money out of thin air", which in turn creates rising prices and a lower standard of living for all of us.

  15. #13
    Quote Originally Posted by Zippyjuan View Post
    SO which interest rates are the government setting and what makes them too low or high? Banks are part of the market since they are the primary source of lending.
    The Federal Reserve is in effect the government, they set the primary rate for major banks (in which case, they either comply, or lose money).

    What makes them too low or too high? By comparison to what people are willing to pay (one of many comparisons you can make). Interest rates are not always parallel to money supply (which can also have its artificial low and high).

    Banks ARE part of the market, which is regulated by FDIC, FR, FTC, DoTr

  16. #14
    Quote Originally Posted by WaltM View Post
    The Federal Reserve is in effect the government, they set the primary rate for major banks (in which case, they either comply, or lose money).

    What makes them too low or too high? By comparison to what people are willing to pay (one of many comparisons you can make). Interest rates are not always parallel to money supply (which can also have its artificial low and high).

    Banks ARE part of the market, which is regulated by FDIC, FR, FTC, DoTr
    Once again, the only interest rates the Fed sets is the interest rates at which banks can borrow from the Fed. They don't tell the banks what rates they should charge. The FDIC, FTC, et al do not set any interest rates.

  17. #15

    Exclamation

    Quote Originally Posted by Zippyjuan View Post
    Once again, the only interest rates the Fed sets is the interest rates at which banks can borrow from the Fed. They don't tell the banks what rates they should charge. The FDIC, FTC, et al do not set any interest rates.
    as I went over earlier (and provided a number of video and even a study) the interest rate the Fed charges impacts the total amount of money in society--the total supply. If you increase the supply, you're going to push down interest rates; if you decrease supply, you'll pull them back up.

    This distorts and screws up the economy because it's effectively a price control.

    Money is a commodity like any other, and as such, when you control its price, you suffer the consequences.

  18. #16
    Quote Originally Posted by Zippyjuan View Post
    Once again, the only interest rates the Fed sets is the interest rates at which banks can borrow from the Fed. They don't tell the banks what rates they should charge. The FDIC, FTC, et al do not set any interest rates.
    Did you not get what I said?

    Because the Federal Reserve sets the money supply and interest rate.

    For sake of argument, let's say the Federal Reserve allows $1T on the market, at 5% to the major banks.

    Major banks cannot charge less than 5% or they lose money.
    They cannot lend more than their reserve requirements permit.
    They cannot print their own money outside of the $1T available.

    FDIC, FTC regulates what they can or cannot do, which forces them to conform to Federal Reserve's reserve requirements, interest rates, and other numbers.

    The opposite is not true though.

    IF the Federal Reserve gave excess money, or very low interest, banks CAN
    a) lend it at a higher interest for profit (and either make money or risk losing it in competition to those who lend it for less)
    b) hoard the money and create the additional illusion that money isn't available

    So there you have it, 3 different parties.
    The market, the banks, and the Fed. That ought to give SOME perspective as to what's a fair, or artificial rate (and yes, whatever people are willing to pay is fair and real)

    Unless banks are free to issue their own credit, currency independent of regulations, the regulators have set the price already.



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  20. #17

    Exclamation

    Quote Originally Posted by WaltM View Post
    They cannot lend more than their reserve requirements permit.
    correct--that said, the US now officially has a zero reserve requirement (it was effectively zero before, for large amounts of money, but not it's all been removed), but this doesn't mean the banks will abide by zero; it effectively lets them pick their reserve requirement.

    They cannot print their own money outside of the $1T available.
    Not true--if there's a single bank that provides money to every single person in a geographical area (lets say the entire US), then they could make a loan that was $9 trillion, and it'll all come out on the books at the end of the day and conform to a 10% reserve requirement.

    That said, this isn't the case; we have competing banks, so they can't do this (thank heavens the banking sector isn't THAT cartelized), but they will employ a different technique; if there's, say $100 in the bank, they'll loan out $90, yet maintain a claim on the original...so you have a double claim, and thus really $190 in the economy.

    Therefore, that $1 Trillion, through all the banks, still has the potential to collectively create $9 trillion, though it's no guarantee it'll be this much.

    http://mises.org/daily/4499

  21. #18
    Quote Originally Posted by Fox McCloud View Post
    as I went over earlier (and provided a number of video and even a study) the interest rate the Fed charges impacts the total amount of money in society--the total supply. If you increase the supply, you're going to push down interest rates; if you decrease supply, you'll pull them back up.

    This distorts and screws up the economy because it's effectively a price control.

    Money is a commodity like any other, and as such, when you control its price, you suffer the consequences.
    In your example, the Fed is not setting the interest rates. Even you yourself say that that the interest rates are being set by supply and demand. The Fed can try to increase or decrease the supply of money, true. In general, they have persued a fairly steady, predictable growth in the money supply. Fed rates may influence but do not dictate what interest rates anybody else charges. Back when I first purchased my home, I was hoping to refinance at a lower interest rate and was watching as the Fed continuously lowered the prime rate at the time. But mortgage rates were not going down- they went in the opposite direction. If the Fed was controlling rates, those should have been going down too.

  22. #19
    Quote Originally Posted by WaltM View Post
    Did you not get what I said?

    Because the Federal Reserve sets the money supply and interest rate.

    For sake of argument, let's say the Federal Reserve allows $1T on the market, at 5% to the major banks.

    Major banks cannot charge less than 5% or they lose money.
    They cannot lend more than their reserve requirements permit.
    They cannot print their own money outside of the $1T available.

    FDIC, FTC regulates what they can or cannot do, which forces them to conform to Federal Reserve's reserve requirements, interest rates, and other numbers.

    The opposite is not true though.

    IF the Federal Reserve gave excess money, or very low interest, banks CAN
    a) lend it at a higher interest for profit (and either make money or risk losing it in competition to those who lend it for less)
    b) hoard the money and create the additional illusion that money isn't available

    So there you have it, 3 different parties.
    The market, the banks, and the Fed. That ought to give SOME perspective as to what's a fair, or artificial rate (and yes, whatever people are willing to pay is fair and real)

    Unless banks are free to issue their own credit, currency independent of regulations, the regulators have set the price already.
    Banks are not required to borrow money from the Fed. If they feel the Fed is charging too much to borrow from, they can seek other sources such as other banks. When they do decide to borrow, it is because they agree to the terms and rates offered. It is a free market choice. Banks can horde money at any interest rate. That is their decision as well.

  23. #20
    Quote Originally Posted by Zippyjuan View Post
    Banks are not required to borrow money from the Fed.
    Banks aren't required to borrow money from anybody, or lend it to anybody.

    They're not ALLOWED to print their own money or invent their own currency (not even credit card companies are allowed to do it).

    If they feel the Fed is charging too much to borrow from, they can seek other sources such as other banks.
    But those banks, or rich people, too, are only allowed to borrow what they have, and are lent at.

    When they do decide to borrow, it is because they agree to the terms and rates offered. It is a free market choice. Banks can horde money at any interest rate. That is their decision as well.
    Do you deny that banks cannot create or lend money than the Fed allows?

    I take it you must be one of those people who believe the status quo is fine, gold standard is stupid and legal tender laws are unenforceable.

  24. #21
    Do you deny that banks cannot create or lend money than the Fed allows?
    I would agree with that statement, but that does not mean that banks cannot set their own interest rates. There is a lot of competition in the borrowing/ lending field. I you feel one is not paying you enough interest or another is charging you too much there are many other places you can go. And the competition is even more international these days- maybe more so for larger businesses than the individual but if rates in the US are too high a company can try to secure credit from some place in say Europe or Asia.
    Last edited by Zippyjuan; 06-24-2010 at 05:14 PM.

  25. #22
    Quote Originally Posted by Zippyjuan View Post
    I would agree with that statement, but that does not mean that banks cannot set their own interest rates.
    Yes, it does, to a good extent.

    They can only set their interest rates HIGHER for profit, not LOWER, or they lose money (which is assuming overhead is free). They're also required to keep reserves, so they can't lend more than a certain amount of money.

    There is a lot of competition in the borrowing/ lending field.
    They're only competing amongst the limited amount made available by the monopoly printing press (unless they commit fraud and overlend to subprime).

    I you feel one is not paying you enough interest or another is charging you too much there are many other places you can go.
    Really? Can you tell me currently who's going to give me 5% a year on a CD?
    Can you tell me who wants to lend me money at negative interest? (banks are allowed to do it, right?)
    Yeah, tell me that has nothing to do with the Fed.

    And the competition is even more international these days- maybe more so for larger businesses than the individual but if rates in the US are too high a company can try to secure credit from some place in say Europe or Asia.
    they COULD, and that's assuming you're talking about a country which we don't owe money to and has their own production to back up their currency, or else you're just circle jerking.

  26. #23
    They're only competing amongst the limited amount made available by the monopoly printing press (unless they commit fraud and overlend to subprime).
    The supply of everything is finite. If the supply of money was not limited, the interest rates (the price for money) would be zero and the prices of goods and labor would be infinitely high.

    Really? Can you tell me currently who's going to give me 5% a year on a CD?
    Can you tell me who wants to lend me money at negative interest? (banks are allowed to do it, right?)
    Yeah, tell me that has nothing to do with the Fed.
    The ability to shop for an interest rate does not guarantee you a particular rate you want. An agreement is reached when both parties agree on the price. If you would only take out a CD with 5% interest and you cannot find one, then it is not likely you will take out a CD- unless you are willing to settle for a lower price (interest rate). Loans occur when both parties agree- whether that is between a bank and the Fed or the bank and a borrower or depositor.

    What about a CD at 100%? I would like to see that too- but not at the cost of 100% inflation to go along with it. Interest rates are low because the rate of inflation is low. That should be a good thing, right? Remove all limits on the supply of money and prices will go crazy. Would that be a good thing? I don't think so.

    Every business (and banks are a business like all others) will pay less on their inputs (in the case of banks interest on deposits) and charge more on their output (loans for banks) or will be unable to stay in business for long. Absolutely true. Banks could if they wanted to offer a negative rate but like any store paying people to take home their products, they would not stay in business long. But they are not prevented from doing so if they wanted to. They are free to set their interest rates to what works best for them. If they want to attract more deposits, they can offer higher interest rates. If they want to attract more borrowers, they can lower what they charge and make a smaller margin on each one. The Fed does not tell them what rates to set. Nor does any other government agency.

  27. #24
    Zippy, you completely misinterpreted what I stated.

    I said that the Fed sets the rates at which banks can borrow from it and the rate at which banks can charge other banks interest as well (interbank lending). This directly affects the amount of money/credit in society, which has an influence on the overall "market" interest rate (which isn't truly a market rate).

    When they increase the supply of money they do push down the "market" interest rate, which is where the problems begins.

    As I've said twice before, when you have the free time please watch one or both of those videos--it'll help you understand how it works...in addition, that paper provides empirical evidence that the Austrians are correct in the trade cycle/business cycle theory.

    Last, but not least, if you're still having problems grasping the issue, then Rothbard's "What has the Government Done to Our Money? (and) The Case for the 100% Gold Dollar" and "The Mystery of Banking" are both books that you should read, as it will more concisely explain it than I can at this point in time. I've recommended them to you on multiple occasions, but you seem to want to ignore them (I do realize, however, you could be ultra busy, but none-the-less, at least look into them...AFAIK they're both free on the Mises institute in PDF form).
    Last edited by Fox McCloud; 06-24-2010 at 06:17 PM.



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  29. #25
    which has an influence on the overall "market" interest rate (which isn't truly a market rate).
    Can influence rates but does not set them. There are many different interest rates. As I mentioned previously some do (but do not have to) track what the Fed does with short term rates and some like mortgages or car loans more closely follow Treasury rates which are set by auction. The Fed influence is strongest in the short term interest rates- less than six months.

    This chart shows how the various interest rates do not necessarily follow what the Fed does:
    Note particularly what happens around 2003 when the Fed began raising the prime interest rate and federal funds rate fairly dramatically. Only one year CDs followed it.


    http://www.bankrate.com/brm/news/fed/fedchart.asp

    And let me quote from a more recent chart: http://www.bankrate.com/brm/news/fed...rest-rates.asp
    Not all types of interest rates move in lockstep with the Federal Reserve Board, which influences short-term rates by changing the federal funds rate. Mortgage rates, which are long-term debt, are more aligned to moves in the long-term bond market and are less affected by changes in Fed policy.
    Last edited by Zippyjuan; 06-24-2010 at 06:28 PM.

  30. #26

    Exclamation

    Quote Originally Posted by Zippyjuan View Post
    Can influence rates but does not set them. There are many different interest rates. As I mentioned previously some do (but do not have to) track what the Fed does with short term rates and some like mortgages or car loans more closely follow Treasury rates which are set by auction. The Fed influence is strongest in the short term interest rates- less than six months.

    This chart shows how the various interest rates do not necessarily follow what the Fed does:
    Note particularly what happens around 2003 when the Fed began raising the prime interest rate fairly dramatically. Only one year CDs followed it.


    http://www.bankrate.com/brm/news/fed/fedchart.asp
    again, the rates only influence the amount of money/credit in society, I wouldn't expect there to be an exact 1 for 1 correlation in all cases; ultimately it's the money supply that affects the so called "market interest rate".

  31. #27
    Quote Originally Posted by Zippyjuan View Post
    The supply of everything is finite. If the supply of money was not limited, the interest rates (the price for money) would be zero and the prices of goods and labor would be infinitely high.
    If this were true, how does the Fed NOT set interest rates if they are coming from the top, with the biggest supply of legitimate credit?



    The ability to shop for an interest rate does not guarantee you a particular rate you want.
    Cute, so the lack of availability doesn't mean it doesn't exist?
    Are you saying I have a right to kill and rob people, but those people just don't exist (they exist in imaginaryland)?

    An agreement is reached when both parties agree on the price. If you would only take out a CD with 5% interest and you cannot find one, then it is not likely you will take out a CD- unless you are willing to settle for a lower price (interest rate).
    And who, other than the Federal Reserve could be more responsible for this?
    I seriously HATE to sound like I'm against the Federal Reserve, I'm really not.

    Why can't somebody pay out 5% interest with FDIC guarantee, you know why?
    a) he can't lend it to somebody stupid enough to pay that much
    b) FDIC won't guarantee it if it's not conformed with Federal Reserve standards

    Loans occur when both parties agree- whether that is between a bank and the Fed or the bank and a borrower or depositor.
    So why isn't anybody giving me a negative interest loan?
    Nothing to do with the fact they can't print money?


    What about a CD at 100%? I would like to see that too- but not at the cost of 100% inflation to go along with it.
    And your point?
    Who is capable of creating that to begin with?
    Keep dodging my question!

    Interest rates are low because the rate of inflation is low. That should be a good thing, right? Remove all limits on the supply of money and prices will go crazy. Would that be a good thing? I don't think so.
    It may be a good thing to some people, but looks like you're starting to see the harm in artificial manipulation of money supply, which the Federal Reserve does at times, and is said to prevent.

    Every business (and banks are a business like all others) will pay less on their inputs (in the case of banks interest on deposits) and charge more on their output (loans for banks) or will be unable to stay in business for long. Absolutely true.
    So how can you disagree that once the Federal Reserve sets an interest rate, along with reserve requirements, they've in effect set rates (minimum for lending, maximum for saving) for most banks?

    Banks could if they wanted to offer a negative rate but like any store paying people to take home their products, they would not stay in business long. But they are not prevented from doing so if they wanted to.
    Right, just like I'm not prevented from being a criminal, I just need to know that I'll be punished for it. Gotcha!

    They are free to set their interest rates to what works best for them. If they want to attract more deposits, they can offer higher interest rates. If they want to attract more borrowers, they can lower what they charge and make a smaller margin on each one. The Fed does not tell them what rates to set. Nor does any other government agency.
    Yes, the Fed tells them they can't lend more than the Fed allows, nor can they have less on reserve then required by law.

    If a bank promised to pay 20% interest on a CD, which they have no intention of getting from another source, this is fraud, or violation of reserve requirements (not as simple as just stupid business practice).

    Are you just playing with words to distinguish "prevention" from "a stupidly impossible or fraudulent decision"?

  32. #28
    Quote Originally Posted by Fox McCloud View Post
    Zippy, you completely misinterpreted what I stated.

    I said that the Fed sets the rates at which banks can borrow from it and the rate at which banks can charge other banks interest as well (interbank lending). This directly affects the amount of money/credit in society, which has an influence on the overall "market" interest rate (which isn't truly a market rate).
    According to Zippy, that's not telling banks what they can't do. They'd just be stupid to promise what they can't pay, or it'd be OK to promise what they can't pay because "buyers beware".


    When they increase the supply of money they do push down the "market" interest rate, which is where the problems begins.

    As I've said twice before, when you have the free time please watch one or both of those videos--it'll help you understand how it works...in addition, that paper provides empirical evidence that the Austrians are correct in the trade cycle/business cycle theory.

    Last, but not least, if you're still having problems grasping the issue, then Rothbard's "What has the Government Done to Our Money? (and) The Case for the 100% Gold Dollar" and "The Mystery of Banking" are both books that you should read, as it will more concisely explain it than I can at this point in time. I've recommended them to you on multiple occasions, but you seem to want to ignore them (I do realize, however, you could be ultra busy, but none-the-less, at least look into them...AFAIK they're both free on the Mises institute in PDF form).
    keep in mind, this is coming from a guy who thinks there's no such thing as artificially low or high housing prices.

  33. #29
    Quote Originally Posted by Zippyjuan View Post
    Can influence rates but does not set them.
    right right right.

    so there's really nothing you're banned, or prevented from, or not allowed to do.

    you are allowed to kill, rob, rape, steal, you just need to pay your penalty and fine.

    in your view of the world, gays are already allowed to marry, they just don't have the government's recognition. You don't own your house, you just have a paper that says you're responsible for paying taxes on it. You're not telling people they can't enter your house, you'll just call the police if they do. Killing isn't a crime, it's just something we'd put a person in prison for. Gambling isn't about risk, odds or luck, it's just your ignorance. A policeman has no power over you, he just uses a gun to enforce the law which he believes is his job. Nobody has a job, they just have a place to waste their time everyday, after they're promised they get a paycheck.

  34. #30
    Quote Originally Posted by Zippyjuan View Post

    do you NOT notice something?

    all interest rates go in the same direction as the Fed.

    Only CD hugs it close, nothing is consistently below the Fed's rate.

    There are reasons (gonna get it this time?)
    a) it'd be a losing proposition (can be considered fraud)
    b) FDIC, FTC, and other banking regulations don't allow them to lend out more than the Fed's issued supply of money (as you know yourself, it's a zero sum game)



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