Why Are Interest Rates So Low ? (loans, tier, complaint, credit)

[blacktothefuture]

Why are they so low. It would seem to me that if it were to be raised people would start saving more and more, I also know that it would make it harder for businesses to expand and survive and harder for people to meet their mortgage payments. But Interest Rates have been higher during good times and bad and people have survived. So why are they so low.

[mathjak107]

there is a whole host of economic mumbo jumbo that folks in this thread will hand you why its bad, it is a plot , its the work of the devil , etc, etc etc.

savings accounts are where you store money made from investments or money you want to keep out of the risk pool . it is also for money waiting to be spent.

what it is not is an investment for growing money, it is only a storage place.

if you did the right thing and had a diversified investment plan you did great just because of the low rates.

most money put in banks by the folks complaining about the interest is spent for bills any way.

while rates may have been higher during other bad times ,inflation was higher too. the real returns still sucked!

yes the real returns are lower than typical now but the damage to the financial system was greater too.

folks owe so much money on credit that they owe more than most have in the bank so lower rates help them more than hurt them..

low rates keep companies able to do business with customers who take longer to pay. instead of laying people off we have been hiring . we would have had to lay people off if they cut these customers off or would not do business with slow payers..

the concrete reasons are the world is de-leveraging and is borrowing less.

every asset class has a good time and a bad time to be in it for various reasons. CASH IS AN ASSET CLASS.

the fed did everything but drop leaflets from helicopters warning us world wide rates are falling.

those that paid attention shifted to nice safe secure treasury bonds and made incredible capital gains.

those that did not and stayed in cash instruments got burned like anyone else who owns the wrong asset class at the wrong time.

now you can get the mumbo jumbo explanations from the arm chair economists here.

[bmw335xi]

Originally Posted by blacktothefuture

Why are they so low. It would seem to me that if it were to be raised people would start saving more and more, I also know that it would make it harder for businesses to expand and survive and harder for people to meet their mortgage payments. But Interest Rates have been higher during good times and bad and people have survived. So why are they so low.

Because the government wants to make it easier for people to be able to afford loans for homes, equipment, cars and businesses, which in turn grows the economy. When government wants to increase growth, they lower interest rates. When government wants to slow growth, they increase interest rates.

Here is a more detailed explanation:

http://www.infotrak.com/Financial-Ar...es-Aff_70.html

[mathjak107]

now you did it , ha ha ha ,get ready for the attack from the economist wannabees.....

[bmw335xi]

In my family's case it's the truth. We invested in another home because of low interest rates. We expanded our business with a loan because of low interest rates. We refinanced one of our houses because of low interest rates. When interest rates are high, it promote savings.

[mathjak107]

between refinancing or just getting better deals on homes so many have lower monthly expenditures than even years ago.

while rents have gone up no question from demand they have not gone up anywhere near what demand should have driven them to just because of lower rates and prices on property.

[chuckmann]

Originally Posted by blacktothefuture

Why are they so low. It would seem to me that if it were to be raised people would start saving more and more, I also know that it would make it harder for businesses to expand and survive and harder for people to meet their mortgage payments. But Interest Rates have been higher during good times and bad and people have survived. So why are they so low.

Well, the obvious answer is that the Fed is deliberately manipulating the interest rates to zero in order to encourage businesses to borrow in order to expand and create jobs. Bernanke seems to have overlooked the lesson of Keynesianism of the 30's, which is that economic equilibrium can and will occur even if there are low interest rates and massive unemployment. Ironically, we in America seem to be finding ourselves in that exact place that the Japanese found themselves in the 1990's, to whit a lost decade and more.

Here's the point: In economic theory, when times are tough, businesses decide to play it safe, stand on the sidelines, and wait for reason to invest (aka borrow). In the meantime, people lose their jobs as businesses lay off in order to survive. Remember that marginal cost=marginal revenue, in terms of economic analysis. When MC=MR a business maximizes profits. This applies in good business environments. But in a bad business environment, when MC=MR, losses are minimalized, so long as fixed costs are covered.

Keynes, after discovering that equilibrium could occur even with low interest rates and high unemployment, suggested that if Government were to "prime the pump" so to speak, then business woulds step up, encouraged by the growth that Government inspired, and we would be well on our way to recovery.

Well, in retrospect we all know that it didnt work that way. Government cannot spend enough money to do anything other than distort the economy and shift the major driver to unproductive means.

In a perfect world, low interest rates plus high unemployment would 1) encourage business to borrow in order to expand and 2) encourage business to hire because with high numbers of unemployed salaries would be reduced. Supply and demand in both cases. It does not work that way in real life because business will not take action until their collective ass has been kissed enough that they will dip their toes into the water.

There is no perfect answer. There is no magic bullet. Over the past 40 years we have created an environment in this county in which business has come to expect that they should suffer no risk, that Government should always bail them out. No consequences = no problem for the too big to fail crowd, with the 2nd and 3rd tiers expecting at least the crumbs for which they can lobby.

Think "supply and demand". If you are clear on the concept, your question will be answered. But be sure to factor in "expectation". This is what has distorted the pure economics of Adam Smith and his immediate successors.

[Driller1]

Originally Posted by blacktothefuture

Why are they so low. It would seem to me that if it were to be raised people would start saving more and more, I also know that it would make it harder for businesses to expand and survive and harder for people to meet their mortgage payments. But Interest Rates have been higher during good times and bad and people have survived. So why are they so low.

Because our money is worth very little.

[celcius]

Originally Posted by blacktothefuture

Why are they so low. It would seem to me that if it were to be raised people would start saving more and more, I also know that it would make it harder for businesses to expand and survive and harder for people to meet their mortgage payments. But Interest Rates have been higher during good times and bad and people have survived. So why are they so low.

You came close to answering your own question here. The latter is far more important than the former right now.

This chorus of low-rate complaints is getting old. Ben has addressed it countless times in his congressional testimony. It's not worth setting growth back just so retirees can get more from their CDs.

[mathjak107]

Which if they have a good solid plan should not be counting on cd's for growth in the first place..