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Let me see if I have this straight:
1. Banks are reluctant to lend to each other these days.
2. Lenders make more money when interest rates go up, and less money when rates go down.
Therefore,
3. The Fed thinks that they can improve things by repeatedly cutting interest rates on inter-bank loans, now to almost nothing.
Am I crazy to think that this is backwards? The problem is a lack of supply (of loans), and they seem to be taking steps that increase demand and reduce supply.
1. Banks are reluctant to lend to each other these days.
2. Lenders make more money when interest rates go up, and less money when rates go down.
Therefore,
3. The Fed thinks that they can improve things by repeatedly cutting interest rates on inter-bank loans, now to almost nothing.
Am I crazy to think that this is backwards? The problem is a lack of supply (of loans), and they seem to be taking steps that increase demand and reduce supply.
confused
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Reading Robert Reich's blog and
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I'll have to check out those blogs.
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I think you're dead-on. It looks like they're trying to motivate borrowers, but since that's not the problem, there's no reason to think it will improve anything.
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The Fed rate is basically the rate that banks are charged for overnight loans of federal reserve money, which they use in order to prevent an overdraft, should many people take cash out overnight. The Fed is basically giving away cash to banks at no charge, to prevent them from finding themselves overdrafted (and then crashing and burning like everyone else does when they overdraft). They're basically a shortcut to funds that work faster than deposits (which need to clear) or interest on deposits (which needs to accrue), and they allow a bank to have more lending power immediately.
Since the Fed controls these funds (banks that draw on them are required to keep a certain amount of reserve funds in the Federal Reserve, from which all this borrowing takes place, rather than direct institution-to-institution loaning), anyway, there's no danger that the lenders will freak out over federal reserve funds being used and prevent the loan from happening (well, they might freak out, they can't do anything about it).
In some weird, reverse way, lowering the Fed Rate actually increases supply, as the Fed pretty much loans indiscriminately and the lower rate means that more banks can afford these loans. It all sort of comes out of a single pool of money that's already there, so the supply won't increase even if it's more attractive for banks to do more loaning.
At least, such is my understanding of how it works. I couldn't honestly tell you if it's actually a good idea or not.
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I suppose there's some sense there. Twisted sense, but sense. But it still doesn't seem to address the issue of not loaning because they don't trust that the loans will get paid back (which I gather is the current problem), rather than not loaning because they don't have the money to loan.
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I tell ya, crap broadcast TV can do wonders for your education.
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Come to think of it, that may be why you understand this stuff better than I do.