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Higher short rates will increase lending and employment. Taylor Cottam explains how a steep...

Higher short rates will increase lending and employment. Taylor Cottam explains how a steep yield curve reduces the need for banks to lend to anyone except the Treasury, and who needs a big team of loan originators when one person with a computer can hit offers on Treasuries all day long.
Comments (9)
  • MarketGuy
    , contributor
    Comments (3983) | Send Message
     
    and THIS is the real priority of the Fed...to enrich the banks. period.
    25 Jan 2011, 09:15 AM Reply Like
  • Christopher Grey
    , contributor
    Comments (117) | Send Message
     
    Exactly. Finally somebody who has the guts to say this publicly. It is obvious to anyone who understands basic economics that this is the result of Fed policies. The other result is asset bubbles because people cannot earn a decent return without taking excessive risk. Overall, these policies enrich banks and speculators, destroy the real economy, and harm investors.
    25 Jan 2011, 09:24 AM Reply Like
  • bbro
    , contributor
    Comments (9324) | Send Message
     
    Higher short rates will make a business increase its employment????

     

    Can you say ,,,,,,,naive.....
    25 Jan 2011, 10:00 AM Reply Like
  • Tack
    , contributor
    Comments (12761) | Send Message
     
    Not entirely.

     

    Not surprisingly, ZIRP provides a huge disincentive for banks to make loans to the private sector. If rates are allowed to rise, banks will start to find the spreads attainable in the private sector more interesting and will increase lending. Simultaneously, if rates are seen to be on the rise, many businesses will increase loan demands instead of perpetuating the behavior of the last couple years, waiting endlessly for those ever-lower rates that the deflationists forecast.

     

    The net-net of this increased stimulus to economic activity will be more hiring, as various postponed projects move forward.
    25 Jan 2011, 10:12 AM Reply Like
  • bbro
    , contributor
    Comments (9324) | Send Message
     
    If we agree prime rate is very important for say small businesses...
    the spread of prime to 3 month libor has averaged over the last 20 years at 265 bps....from January 2004 to January 2008 it averaged
    272 spread... we seem to think all the Fed has to do is raise rates
    and businesses will borrow....very convoluted....rates rise because
    economic demand has pressured businesses to borrow....now if
    rates rise because lenders are afraid to lend to each other ( like in 2008) you get a crunch and then a crash....
    25 Jan 2011, 11:54 AM Reply Like
  • Tack
    , contributor
    Comments (12761) | Send Message
     
    bbro:

     

    All you have to do is look at the behavior of the home-buyer market every time there is a reversal to higher rates. We have just seen that very effect illustrated in the last housing report. When people are conditioned to expect ever-lower rates, they sit on their hands, expecting everything to be cheaper next month. Then, we that cycle gets interrupted by higher rates, even if temporarily, we see a rush to the purchase and loan windows. It's routine and a predictable aspect of human nature.

     

    Businesses aren't excluded from this phenomenon because they're run by people, too. Even the banks have just said they've seen a noticeable, if modest, increase in loan demand. If rates were allowed to trend higher, we'd see more and more people come off the sidelines to finance various postponed purchases and investments. This trend is not impaired, at all, by higher rates, especially at these near-all-time low rates. It would take climbing to several percentage points higher before there was any noticeable dampening on demand, due to borrowing costs.

     

    Low interest rates negate business activity on both sides of the loan window. The borrowers expect either lower rates or perceive no opportunity cost by waiting, and the lenders are not motivated to lend at the returns available. Just as rates can be too high; they can be too low.
    25 Jan 2011, 12:07 PM Reply Like
  • Christopher Grey
    , contributor
    Comments (117) | Send Message
     
    Higher short rates to do not increase employment directly, but slightly higher short rates of 1% or 2% would provide an incentive for banks to lend. Lending to businesses gives employers more capital. That does increase employment. It's amazing to me that people are unable to look at history or the world around them. Japan has had zero short rates for the better part of 20 years and no growth. The US has had the lowest short rates the past 10 years for decades and the worst growth we've had since the Depression. Brazil, China, Russia, and India have much higher interest rates and much higher growth. Zero short rates do not increase growth. Zero short rates are a symptom of an economy that is very sick, but they are also an enabler of that sickness rather than a cure. Of course if rates we're increased right now there would be an adjustment, but that's the problem with artificially low rates. It's a trap from which you can never exit. Talk to the Bank of Japan. They publicly announced recently that they will no longer do quantitative easing because they've learned it doesn't work. It just temporarily increases asset prices, and it reverses as soon as the quantitative easing is over. There is no long term benefit at all.
    25 Jan 2011, 10:13 AM Reply Like
  • Poor Texan
    , contributor
    Comments (3529) | Send Message
     
    I believe Bernacke is also trying to keep rates low to keep our hugh deficit expense manageable. Interest is taking a bigger piece of government expenditures at these low rates. When they start up, then what?
    25 Jan 2011, 03:58 PM Reply Like
  • Tack
    , contributor
    Comments (12761) | Send Message
     
    Tex:

     

    When the rates get higher, the higher level of economic activity that will ensue will make the Government reams more in tax revenues thus paying for interest and lots of other stuff.

     

    The trouble with containment strategems is that they spiral inward, like that infamous "foo bird," who flew in ever-smaller concentric circles until he flew up his own a** and disappeared.
    25 Jan 2011, 04:02 PM Reply Like
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