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Thread: Are interest rates determined by the free market?

  1. #1

    Are interest rates determined by the free market?

    How many of you think interest rates are set by the free market? It seems to me there's quite a few on this website which seems crazy to me.

    This is one of Ron Paul's biggest complaints. That the Fed and government are driving rates artificially low:

    Ron Paul: Everyone has been misled by low interest rates:

    https://www.youtube.com/watch?v=6f8yNkKfM0Q

    Just of the top of my head I can think of several ways in which the Fed/Govt drives rates:

    1. Fed Funds rate.

    2. QE (more than 3.5 trillion)

    3. Federally guaranteed mortgages.

    4.The fact that almost all the money loaned to the US govt is by the Fed and other governments and central banks.

    5. Federally guaranteed student loans.



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  3. #2
    There are thousands of interest rates. Which ones are you looking at? As I noted in the other thread, the Fed only sets the rates banks can borrow money overnight. Short term loans are usually following three to five year Treasury notes and long term loans like mortgages usually follow ten or fifteen year Treasuries. The rates on Treasuries are determined by auctions. Rates can follow Fed moves but don't necessarily. I was waiting to refinance my home loan a while ago and was watching the Fed cutting rates at the time but mortgage rates were still moving up.

    That the Fed and government are driving rates artificially low
    The Fed has been raising-not lowering- their overnight rates since 2015. They have been raising them slowly- one quarter of one percent at a time.




    Inflation tracks better but isn't perfect either.

    Last edited by Zippyjuan; 11-02-2018 at 02:27 PM.
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  4. #3
    Since it is always impossible for government to force its will on reality there is always an element of market influence but in our current system it is very small.
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  5. #4
    Quote Originally Posted by Zippyjuan View Post
    There are thousands of interest rates. Which ones are you looking at? As I noted in the other thread, the Fed only sets the rates banks can borrow money overnight. Short term loans are usually following three to five year Treasury notes and long term loans like mortgages usually follow ten or fifteen year Treasuries. The rates on Treasuries are determined by auctions. Rates can follow Fed moves but don't necessarily. I was waiting to refinance my home loan a while ago and was watching the Fed cutting rates at the time but mortgage rates were still moving up.

    If you bring down one rate, you'll bring down others. If you can borrow from one source at 2% you're probably not going to choose another source at 10%.

    If government and the Fed have no influence on rates, why do they do all that stuff I listed originally? Just for laughs?

    Also the CPI does not measure rises in stock prices and homes. That's where the QE goes first before it moves to main street. You think it was Obama's and Trump's great economies that drove stock prices thru the roof? Wait until the next recession and people have to sell their shares of Amazon to buy food and pay rent.
    Last edited by Madison320; 11-02-2018 at 05:14 PM.

  6. #5
    Quote Originally Posted by Swordsmyth View Post
    Since it is always impossible for government to force its will on reality there is always an element of market influence but in our current system it is very small.
    I agree and I was going to add that at some point the government won't be able to control rates. Probably when prices start rising too fast.
    Last edited by Madison320; 11-02-2018 at 04:52 PM.

  7. #6
    The Fed controls overnight rates and can influence longer term rates through QE. The Federal Reserve controls interest rates over the long run but not in the way you think.

    There is always this talk about artificially low interest rates. That would mean you believe there is a natural market rate of interest at any given time. Perfect. If rates are held artficially low, you will get overconsumption of debt, inflation and an overheating economy. Long term rates would go up because of future inflation expectations. We might now just be to that stage.

    But rates weren't artificially low for most of the last ten years. The Federal Reserve wasn't holding rates down. They were low because growth was slow and inflation was low which would lend credence to the idea that rates were artificially high for a large part of that time. Had the Federal Reserve made rates negative in 2008 and 2009, the economy likely would have gotten into expansion far quicker.

    If you are a free marketeer you believe in supply and demand and market clearing prices. Price floors prevent markets from clearing. Zero percent acted as a price floor just like minimum wages acted as a price floor and prevent labor markets from clearing.

    Extremely low rates are indicative of tight monetary policy not loose monetary. High rates are indicative of loose monetary policy. It is counterintuitive but clearly correct. Rates went much higher under Jimmy Carter but inflation kept going up. Rates stayed near zero after the financial crisis but there was no inflation.
    Last edited by Krugminator2; 11-02-2018 at 07:42 PM.

  8. #7
    Quote Originally Posted by Krugminator2 View Post
    There is always this talk about artificially low interest rates. That would mean you believe there is a natural market rate of interest at any given time. Perfect.
    Of course I do. Just like any other price in the free market. Don't you?


    Quote Originally Posted by Krugminator2 View Post
    If rates are held artficially low, you will get overconsumption of debt, inflation and an overheating economy. Long term rates would go up because of future inflation expectations. We might now just be to that stage.

    Rates have been been suppressed since 2008 and I don't see how that's even debatable. Remember it's not just the Fed funds rate that was set to 0%. It was QE and guaranteed loans and demand for loans from other govts and central banks. And we've had an explosion of debt and asset prices. Do you think it was a booming economy that sent the DOW from 7K to 25K?


    Quote Originally Posted by Krugminator2 View Post
    But rates weren't artificially low for most of the last ten years. The Federal Reserve wasn't holding rates down. They were low because growth was slow and inflation was low which would lend credence to the idea that rates were artificially high for a large part of that time. Had the Federal Reserve made rates negative in 2008 and 2009, the economy likely would have gotten into expansion far quicker.
    You think rates were artificially high at times between 2008 and now? The Fed Funds rate of 0%, guaranteed loans, QE, demand for treasuries from foreign govts and central banks were pushing rates UP!

    It doesn't bother me so much that you believe this, but it's highly disturbing to me you seem to be in the majority on a Ron Paul website. We're all Keynesians now I guess.

  9. #8
    Do you think it was a booming economy that sent the DOW from 7K to 25K?
    No. But pushing long term rates down through QE purchases did make stocks relatively more attractive. Also stocks are valued by discounting future cash flows. Low interest rates increase valuations.

    Rates have been been suppressed since 2008 and I don't see how that's even debatable
    You are right. It isn't debatable. Rates were artificially high and that is true beyond a reasonable doubt. All you need is supply and demand graph to realize this.

    And I noticed answer to this riddle.
    Extremely low rates are indicative of tight monetary policy not loose monetary. High rates are indicative of loose monetary policy. It is counterintuitive but clearly correct. Rates went much higher under Jimmy Carter but inflation kept going up. Rates stayed near zero after the financial crisis but there was no inflation.

    Quote Originally Posted by Madison320 View Post
    It doesn't bother me so much that you believe this, but it's highly disturbing to me you seem to be in the majority on a Ron Paul website. We're all Keynesians now I guess.
    1. I certainly like Ron Paul but he has been wrong about everything the last ten years on this topic. He isn't an economist. I care more about truth than what an OB/Gyn says about what the dollar should do.

    2. There is nothing Keynesian about what I said. I could just as easily say we are all socialists now for the refusal to believe in supply and demand and market clearing prices.

    As far as this,
    The Fed Funds rate of 0%, guaranteed loans, QE, demand for treasuries from foreign govts and central banks were pushing rates UP!
    I'll just repost what I said.

    If you are a free marketeer you believe in supply and demand and market clearing prices. Price floors prevent markets from clearing. Zero percent acted as a price floor just like minimum wages acted as a price floor and prevent labor markets from clearing.
    Here is a smart person's take, an actual economist who has been right about everything. http://macromarketmusings.blogspot.c...marketers.html

    As a free-market loving individual, it pains me to see so many of my fellow travelers claim the Fed has artificially suppressed interest rates since the onset of the crisis.....

    What I wish George Will, Bill Gross, and other free market advocates would consider is the possibility that the Fed itself is not the source of the low rates, but simply is a follower of where market forces have pushed interest rates. That is, the Great Recession and the prolonged slump that followed caused interest rates to be depressed and the Fed did its best to keep short-term interest rates near this low market-clearing level.

    But there is more to this story. The crisis was so severe that the market-clearing level of short-term interest rates was pulled down well below 0%. That is a natural consequence of the sharp collapse in business and household spending. The Fed, however, cannot push short-term nominal interest rates very far past 0% because people would start hoarding cash rather than earn negative interest. So instead it was forced to keep short-term interest rates near the zero lower bound (ZLB) while the actual market clearing interest rate level slowly worked its way back up toward zero as the economy healed.

    The irony of this is that the free marketers of the world, like George Will and Bill Gross, should be sympathetic to this story. They believe in the power of prices to clear markets so they should be open to the possibility that sometimes--in severe crises like the Great Depression or Great Recessions--interest rates may need to go negative in order to clear output markets. If so, it is incorrect for them to ascribe the low interest rates to Fed policy since it was simply chasing after a falling market-clearing interest rate level.
    Last edited by Krugminator2; 11-03-2018 at 11:11 AM.



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  11. #9
    http://www.themoneyillusion.com/mone...nterest-rates/

    I’m also happy to announce a new Mercatus working paper by Jeffrey Hummel, on a topic that’s dear to my heart—the myth of central bank control over interest rates.

    Before discussing this idea, I need to reassure readers that both Jeffrey and I acknowledge that on any given day the Fed is able to raise or lower the fed funds rate, through suitable adjustments in monetary policy. But that true fact leads many non-economists, and unfortunately even many economists, to wildly excessive views on the extent to which the Fed “controls” interest rates. The deeper mistake is to confuse the path of interest rates over time with “monetary policy”. Here is the abstract to Jeffrey’s paper:

    "Many believe that central banks, such as the Federal Reserve (Fed), have almost total control over some critical interest rates. Serious monetary economists are more sophisticated. They realize that central bank control over interest rates is very far from complete. Nonetheless, central bank officials and many economists are largely responsible for the popular misapprehension. This is because they persistently and misleadingly describe central bank policy as if it determined interest rates. Their focus on interest rates as both the target and indicator of monetary policy stems from the fact that even those holding the sophisticated view of how monetary policy works tend to overestimate the strength and significance of a central bank’s limited effect on real interest rates. There is no denying that central banks have some impacts on interest rates, in both the short run and the long run. However, this working paper argues that not only is the popular belief in precise central bank management of interest rates simply wrong, but also even the sophisticated view of central bankers and mainstream monetary economists turns out to be overstated. In fact, continued targeting of interest rates by central banks has even led to some confusion and policy errors."



  12. #10
    Quote Originally Posted by Krugminator2 View Post

    You are right. It isn't debatable. Rates were artificially high and that is true beyond a reasonable doubt. All you need is supply and demand graph to realize this.

    Why would anyone loan money at a negative rate of interest?

  13. #11
    Quote Originally Posted by Madison320 View Post
    Why would anyone loan money at a negative rate of interest?
    Banks would still lend money at a positive rate. Overnight rates were near zero but mortgage rates were still 3% or so.

    Most people would prefer to put money in a bank at a small negative rate as opposed to having big sacks of cash at their homes. And the negative rates would encourage people to invest as opposed to putting money in the bank which would be the whole point of negative interest rates.

  14. #12
    I would dump it into land , gold & guns before I accepted a negative rate .
    Do something Danke

  15. #13
    For the past decade there has been an unholy amount of bad debt floating about. To know if inflation was high or low you would have to know how much of that there was.

    I don't think even the central banks have any idea what anybody is holding, jsut that its big and bad, and keeping it together is doing really weird things to the economy globally.

    As a lot of this debt has been rolled over at progressively lower and lower interest rates it becomes near impossible for interest rates to move higher without blowing up a lot of debt that becomes rapidly unserviceable at higher rates.

    Nothing has gone boom yet, no hyper inflation... so perhaps the giant sucking sound of deflationary bad investments is a lot worse than we presume?
    Last edited by idiom; 11-04-2018 at 04:19 AM.
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  16. #14
    Quote Originally Posted by Krugminator2 View Post
    Banks would still lend money at a positive rate. Overnight rates were near zero but mortgage rates were still 3% or so.

    Most people would prefer to put money in a bank at a small negative rate as opposed to having big sacks of cash at their homes. And the negative rates would encourage people to invest as opposed to putting money in the bank which would be the whole point of negative interest rates.

    That "smart person" you quoted thought banks would loan at a negative rate, "the crisis was so severe that the market-clearing level of short-term interest rates was pulled down well below 0%." And that's not even the "real" rate of return. The "real" rate of return has been negative for a large amount of bank loans since 2008. How could that not be artificially low?

  17. #15
    Quote Originally Posted by idiom View Post
    For the past decade there has been an unholy amount of bad debt floating about. To know if inflation was high or low you would have to know how much of that there was.

    I don't think even the central banks have any idea what anybody is holding, jsut that its big and bad, and keeping it together is doing really weird things to the economy globally.

    As a lot of this debt has been rolled over at progressively lower and lower interest rates it becomes near impossible for interest rates to move higher without blowing up a lot of debt that becomes rapidly unserviceable at higher rates.

    Nothing has gone boom yet, no hyper inflation... so perhaps the giant sucking sound of deflationary bad investments is a lot worse than we presume?
    I agree and the cost of servicing the debt is one of the main reasons the govt/fed is trying to hold down rates.

  18. #16
    Quote Originally Posted by Madison320 View Post
    "the crisis was so severe that the market-clearing level of short-term interest rates was pulled down well below 0%." And that's not even the "real" rate of return. The "real" rate of return has been negative for a large amount of bank loans since 2008. How could that not be artificially low?
    Because people had a high demand to hold cash and were willing let inflation eat away at their money? Seems like the right answer.



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  20. #17
    Quote Originally Posted by Madison320 View Post
    How many of you think interest rates are set by the free market?
    The markets are not free, therefore NO.
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  21. #18
    Quote Originally Posted by Krugminator2 View Post
    Because people had a high demand to hold cash and were willing let inflation eat away at their money? Seems like the right answer.
    Interest rates are the price of money. During the recession, nobody was interested in borrowing so the price of money collapsed.
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  22. #19
    Quote Originally Posted by Krugminator2 View Post
    Because people had a high demand to hold cash and were willing let inflation eat away at their money? Seems like the right answer.
    You're getting the borrower confused with the lender. Negative rates are great for the borrower but they suck for the lender. Why would you loan money out and pay the borrower?

  23. #20
    Quote Originally Posted by osan View Post
    The markets are not free, therefore NO.
    Do you think rates are artificially high or low? Up until now I didn't think "artificially high" was even an option.

  24. #21
    Quote Originally Posted by Madison320 View Post
    You're getting the borrower confused with the lender. Negative rates are great for the borrower but they suck for the lender. Why would you loan money out and pay the borrower?
    Banks did not actually have negative interest rates. Unless you consider non- interest paying accounts which have added fees. Some central banks did have negative rates for a time. That meant they were paying people willing to borrow from them to try to get more money flowing.
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  25. #22
    Quote Originally Posted by Madison320 View Post
    Do you think rates are artificially high or low? Up until now I didn't think "artificially high" was even an option.
    I'd call a negative real interest rate "artificially low", yes.
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  26. #23
    Quote Originally Posted by Zippyjuan View Post
    Banks did not actually have negative interest rates.
    The Fed most certainly did. When you are charging 0.25% in a 5% inflationary environment, your REAL interest rate is in fact a negative 4.75%

    This is all remedial finance 001, so either you're very ignorant of the basics, or you are trolling. Or perhaps both.
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  27. #24
    Quote Originally Posted by osan View Post
    The Fed most certainly did. When you are charging 0.25% in a 5% inflationary environment, your REAL interest rate is in fact a negative 4.75%

    This is all remedial finance 001, so either you're very ignorant of the basics, or you are trolling. Or perhaps both.
    Yes, if you have a rate of 0.25% and inflation was 5% then the "real" rate is negative 4.75%. You are right.

    I was talking about what nominal rates (not including inflation) were. The Fed and US banks did not have negative nominal interest rates. In the countries where their central banks went to negative interest rates, the banks did not pass along those negative nominal interest rates to their customers either. Bank borrowers or depositors did not get negative nominal interest rates.
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  29. #25
    Quote Originally Posted by Zippyjuan View Post
    I was talking about what nominal rates (not including inflation) were.
    Then you should have written that. Words matter. "Nominal" and "real" as modifiers to "rate" and "interest" renders the latter two potentially very different.

    Did I mention that words matter?
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  30. #26
    Quote Originally Posted by osan View Post
    I'd call a negative real interest rate "artificially low", yes.
    Exactly!

    I was starting to think I was crazy. This all seems very obvious to me but when you're the only one saying it you start to worry.

  31. #27
    Quote Originally Posted by Zippyjuan View Post
    Banks did not actually have negative interest rates. Unless you consider non- interest paying accounts which have added fees. Some central banks did have negative rates for a time. That meant they were paying people willing to borrow from them to try to get more money flowing.
    As Osan mentioned "real" rates have been negative.

    Anyway that I was arguing with Krugminator's claim that even nominal rates should be negative.

  32. #28
    Quote Originally Posted by osan View Post
    Then you should have written that. Words matter. "Nominal" and "real" as modifiers to "rate" and "interest" renders the latter two potentially very different.

    Did I mention that words matter?
    But what really makes no sense is Krugminator's claim that even nominal rates should be negative. Obviously in that case the real rate would be even more negative.

  33. #29
    Quote Originally Posted by Madison320 View Post
    Exactly!

    I was starting to think I was crazy. This all seems very obvious to me but when you're the only one saying it you start to worry.
    Oh, you're plenty crazy. Just not for those reasons.
    Through lives and lives shalt thou pay, O' king.

    "Itís just interesting to note how constant government oppression can kill peopleís fighting spirit." - Withur We




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  34. #30
    Quote Originally Posted by Madison320 View Post
    ...Krugminator's claim that even nominal rates should be negative.
    On what basis?
    Through lives and lives shalt thou pay, O' king.

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