What evidence is there that Fed policy ever did any good? Why do we worship the Fed chairman?

[Loren Pechtel]

You may not fully understand competition.

No, what I see is you setting up a system where a small number of customers get better rates--expect those to be political cronies for the most part. There won't be enough money involved to force the market, though.

The national bank could also absorb failed banks, rather than sell them off for pennies on the dollar to a mega bank. We have a lot of failed banks in Georgia because the state in a fit of Randian free market fervor removed all regulation of state banks

What's the point? Failed banks are sold off cheap because that's all they're worth. Absorbing them would produce no more value.

You may not understand the concept of value. Typically failed banks aren't sold, they are given to a stronger bank who assume the failed banks liabilities and their assets. . The few exceptions are like the failure of Washington Mutual, the largest bank failure in the nation's history. WaMu had about thirty billion dollars in bad loans, about 10% of their assets. So on their books they were worth about 270 billion dollars. JP Morgan paid the government about two billion dollars for the entire chain of banks. This is from memory, don't hang me if I missed a billion dollars or two. What was their value? Two billion dollars? Or more than two hundred and fifty billion dollars?

As you say--assets minus liabilities. If a bank is insolvent these numbers will be similar or even in the hole.

And if they only paid $2B for it why do you assume it was worth $270B??? If it really were somebody else that would have offered $3B would be screaming.

And with a national bank we wouldn't see a repeat of the refusal of the private banks to write down the mortgages of people who were caught underwater in homes that were worth less than the mortgages, homes that they did want to live in. The banks lost more money by foreclosing than they would have by writing down the mortgage in line with the decreased value of the homes, more often than not simply so that they didn't have show the losses on their books.

And what's going to pay for this???

Google "Bank bailout." It will help your memory. Get back to me when you have figured it out.

In other words, we all pay. The usual liberal game--the responsible pay for the irresponsible.

And the reason the banks would foreclose at a greater loss is that they don't have to foreclose on everyone. Most people still make their payments. Suppose the math is write down an average of $20k or foreclose on 1 in 10 at a $50k loss. You're seeing $20k < $50k but really it's $20k * 100% vs $50k * 10%.

Wow, a genius idea. We will only foreclose on the people who don't make their payments, not on everybody. Why didn't I think of that?

Loren, if you think that I am an idiot just come out and say it.

What I'm saying is that you missed part of the picture.

 

[laughing dog]

In other words, we all pay. The usual liberal game--the responsible pay for the irresponsible.

The usual liberal game? Do you mean that the "liberals" stole the game from the "conservatives" and the "libertarians" and all of the others?

 

[Loren Pechtel]

In other words, we all pay. The usual liberal game--the responsible pay for the irresponsible.

The usual liberal game? Do you mean that the "liberals" stole the game from the "conservatives" and the "libertarians" and all of the others?

No. That one is mostly a liberal game. The conservatives have their own games.

 

[SimpleDon]

(Repeated assertions that supply and demand can set interest rates, but no explanation of how they can do it.)

(Editing out my points that he has no answer for.)

The little target for returning to the quoted post only appears in the very first <QUOTE=SimpleDon;(some numbers)> (inside braces instead of the "<>") that you edit out and replace with my name in bold.

What I do is to copy the the entire <QUOTE=Lumpenproletariat;54765> opening delimiter and use it as I parse out your post.

But I am not going to do that here.

My Socratic questioning has obviously not succeeded. I have been reading too many of dismal's posts, it is his thing and not mine obviously.

I over estimated your interest in economics. Most people understand only as much economics as they need to re-enforce their own personal world view. That apparently includes you.

I over estimated your knowledge of the economic theory that you are relying on. It doesn't seem to go passed "supply and demand are the best way to set interest rates" and "supply and demand are better than the state setting prices."

I over estimated your desire to have an answer to your question. You seemed to have posed it so that you can repeat your uniformed opinions over and over again.

Okay, I will answer your question of "why don't we let supply and demand set the interest rates?"

The short form answer is,

Because no part of "supply and demand for money can set the interest rates" is true, supply and demand can't set the interest rates..

You accept that supply and demand can set interest rates on pure faith. Because a lot of people have this same blind faith you don't question it.

Unlike you, there are people who can't accept things on pure faith. They have to understand how things work. They have to explain how things work.

Unlike you they are willing to expose their faith to reality.

Many people have tried to explain how supply and demand would set interest rates. They have tried to come up a theory for the proposition that you blindly accept. They haven't succeeded. Every theory is filled with holes. Every assumption has been refuted.

Unfortunately the arguments against what you unquestioningly have accepted are numerous. We are talking about the real world and the very complex economy, not some fantasy economy based on the self-regulating free market. And you don't even seem to understand the fantasy. It will be hard to explain the reality to you.

I am willing to try to explain why this is the case if you can convince me that you are interested in the answer. I don't see any reason to bother if you are happy with your endless chant of "why don't we let the market set the increase rates by supply and demand."

Of course, this is the intenet and "I would explain it to you but you won't understand it" is a common dodge. So I will list some of the reasons why supply and demand can't set interest rates. Consider this to be the medium form of the answer, without details and hopefully without any annoying economics' jargon. You may feel free to ignore the remainder of this post, if indeed you have managed to get this far.

• Banks aren't dependent on deposits in order to make loans.
• The banking system creates new money in response to the demand for money.
• Because the demand for credit creates money there has to be an external force to prevent the extremes of over optimism and over pessimism and the resulting over and under production of money respectfully.
• Whether or not to invest is based on projected sales, revenues, projected profits, etc., not interest rates.
• The herd instinct means that human factors are pro-cyclical, there has to be an external, counter cyclical force.
• Savings is not deferred consumption or deferred productive investment, modern financial markets provide options to either.
• Savings has its own value for the saver beyond the interest they receive, it expresses his desire to have readily available money, liquidity.
• Savings is money withdrawn from the economy.
• Savings financial instruments have no costs of production, they have an infinite supply potential.
• A large stock of money is tied up in the secondary financial markets, the money for capital investment might come from this money stock and not represent a change in the time preference, only a change in liquidity.
• The money in the secondary markets can quickly be shifted to either consumption or to productive investments.
• Money is not a commodity, it is not subject to substitution, if you need money nothing else will do, no matter what its cost is.
• The so-called market for savings and investment to possibly set interest rates, the buyers who want money and the sellers, the savers, are insulated from one another by a third party, the banks, who are not neutral in the exchange.

The Fed targets inflation as its guide to set interest rates. This is the best that they can do with the tools that are available to them. The only other tool that they have is open market operations, what you know as the QEs

The Fed is legally required to use these tools to reduce unemployment. A close reading of the laws that govern the Fed requires them to decrease unemployment by lowering interest rates even if it results in inflation. But as a practical matter the Fed ignores the requirement to lower interest rates to reduce unemployment and concentrates on inflation. This is in line with the overall idea that the goal of the government is to transfer as much money as possible to the already rich from the poor and the middle class. This is the stated goal of the policy objectives of one of the two major parties and the unstated goal of about fifty percent of the other one.

 

[Togo]

What's the point? Failed banks are sold off cheap because that's all they're worth. Absorbing them would produce no more value.

You may not understand the concept of value. Typically failed banks aren't sold, they are given to a stronger bank who assume the failed banks liabilities and their assets. . The few exceptions are like the failure of Washington Mutual, the largest bank failure in the nation's history. WaMu had about thirty billion dollars in bad loans, about 10% of their assets. So on their books they were worth about 270 billion dollars. JP Morgan paid the government about two billion dollars for the entire chain of banks. This is from memory, don't hang me if I missed a billion dollars or two. What was their value? Two billion dollars? Or more than two hundred and fifty billion dollars?

As you say--assets minus liabilities. If a bank is insolvent these numbers will be similar or even in the hole.

And if they only paid $2B for it why do you assume it was worth $270B??? If it really were somebody else that would have offered $3B would be screaming.

Because their solvency is based on the ability to meet their obligations, which depends on the market value of the asset in a market where certain categories of asset prices are depressed. What's the market value of something you can't find a buyer for?

The value to the purchaser involves the longer-term value of the asset, which is a different (generally higher) figure. It depends on its ability to produce an income stream.

What happens in a distressed market is that the market value of assets dips, because more people are selling them, and fewer people are able to buy them. The assets themselves, however, are generally income streams, and are no less valuable than they were already. That's why a bankruptcy or fire sale is a good time to pick up bargains.

At present there are plenty of companies picking up cheap debt from distressed sellers. The government is not a distressed seller, and shouldn't be selling off its assets cheaply at this time.

Google "Bank bailout." It will help your memory. Get back to me when you have figured it out.

In other words, we all pay. The usual liberal game--the responsible pay for the irresponsible.

Seems odd to blame them, when it was the conservatives who dropped the rules preventing them from being irresponsible in the first place, and supported the bailout that you're blaming on liberals.

 

[SimpleDon]

No, what I see is you setting up a system where a small number of customers get better rates--expect those to be political cronies for the most part. There won't be enough money involved to force the market, though.

Why do you believe that a national bank would be a small bank? So small that it would be unable to influence consumer interest rates?

The only effective limits on bank lending are demand for loans from credit worthy customers and the capitalization of the bank, currently banks can are limited to a capitalization ratio of 8%, that is their capitalization must be at least 8% of their outstanding loans. The national bank would have no capitalization limits.

Obviously the national bank would be national and offer loans at lower rates than the private banks, if they wanted to lower the interest rates on a class of loans, say consumer retail credit, credit cards. If they offered a lower rate and better terms to customers then why do you think that they wouldn't get the customers.

Reading ahead maybe I am assuming too much about your understanding of banking.

Banks are allowed by the government that charter them to make money out of thin air. There is never a question of a bank not having enough money. This is why the key to having a stable banking system is to regulate and control them to make sure that they can't abuse this ability to make money out of thin air.

Banks main job in a capitalistic system is to make sure that the loans that they make are to customers who can pay back the loans and who are going to use the money responsibly.

Banking gets into trouble when they lose sight of this simple idea. The Great Financial Crisis is a example of that. The banks turned into predatory lenders of home mortgages. That means that they made loans to people that the banks knew wouldn't be able to afford the loan payments when the interest rates increased after the initial teaser low rate period of say three years.

The predatory lender's profit isn't in the interest that they receive but in the asset that they acquire when the borrower defaults on the loan. Since everyone knew that homes not only never lose value but in fact their value always increases the banks would be getting a home that was worth much more than the mortgage amount. It was the perfect plan, as long as home values never went down. When home values dropped the result was the GFC.

Of course, the banks couldn't have become predatory lenders if the regulators had enforced the banking regulations. But they didn't because the regulators truly believed that the banks and the financial markets could regulate themselves. That they would never be so stupid as to risk their own long term viability for short term profits. The regulators were wrong.

It is common for the anti-regulation apologists like you to blame the borrowers for the problems. That is the borrowers responsibility to make sure that they can pay back the loans, and certainly it is for their own financial security. But we have ample evidence over hundreds of years that we can't rely on this restraint over the whole economy to maintain stability in the banking system. That is why we have entrusted banks with this simple job of making sure that the borrower can pay back the loan.

more on this below....

The national bank could also absorb failed banks, rather than sell them off for pennies on the dollar to a mega bank. We have a lot of failed banks in Georgia because the state in a fit of Randian free market fervor removed all regulation of state banks

What's the point? Failed banks are sold off cheap because that's all they're worth. Absorbing them would produce no more value.

You may not understand the concept of value. Typically failed banks aren't sold, they are given to a stronger bank who assume the failed banks liabilities and their assets. . The few exceptions are like the failure of Washington Mutual, the largest bank failure in the nation's history. WaMu had about thirty billion dollars in bad loans, about 10% of their assets. So on their books they were worth about 270 billion dollars. JP Morgan paid the government about two billion dollars for the entire chain of banks. This is from memory, don't hang me if I missed a billion dollars or two. What was their value? Two billion dollars? Or more than two hundred and fifty billion dollars?

As you say--assets minus liabilities. If a bank is insolvent these numbers will be similar or even in the hole.

And if they only paid $2B for it why do you assume it was worth $270B??? If it really were somebody else that would have offered $3B would be screaming.

I may have over estimated your math skills.

WaMu's assets were about $300 billion dollars at the time that they went into bankruptcy. I stated that their bad loans were about $30 billion dollars, about 10% of their assets. Since the 10% number makes it easy to do the math I assumed that you could make the jump to the ~$300 billion number. Now I know.

Their problem was liquidity. The bad loans were an immediate, pressing problem with cash flow, their assets represented money tied up in illiquid, long term loans. In more normal times they would have been able to sell some of their assets to improve their liquidity, their cash flow, but there was not anyone buying loans because the entire banking business was in question. No one knew how far the rot from the mortgage backed securities fiasco went.

This is a another great argument for keeping banks small. There were only a few banks large enough to take over WaMu. They had to be able to accommodate WaMu's assets, their outstanding loans, within their capital ratio, remember the 8%? Small banks mean the possibility of small, easily managed failures. Large banks mean the possibility of large, hard to manage failures. Especially when coupled with the failure to regulate the banks by anti-regulation zealots, that is, Republicans, libertarians, conservatives, Randians, etc.

And with a national bank we wouldn't see a repeat of the refusal of the private banks to write down the mortgages of people who were caught underwater in homes that were worth less than the mortgages, homes that they did want to live in. The banks lost more money by foreclosing than they would have by writing down the mortgage in line with the decreased value of the homes, more often than not simply so that they didn't have show the losses on their books.

And what's going to pay for this???

Google "Bank bailout." It will help your memory. Get back to me when you have figured it out.

In other words, we all pay. The usual liberal game--the responsible pay for the irresponsible.

Who are the responsible ones? All I see are irresponsible parties. But the individual borrowers are only responsible for their own financial security. The banks and the government regulators who failed to regulate are responsible for the banking system stability. It is they who failed the economy, the nation and capitalism.

I have warned you about this before, I am not a liberal. I am a firm capitalist, but a realist that sees its flaws as well as its advantages. I am a businessman, I was sub-C suite in an international, capital machine supplier whose market share was one and a half billion dollars. I am an engineer by training and I don't share either the conservatives' fear of science or liberals' fear of technology. I answered the bell and fought in Vietnam, I have contempt for those who discovered their opposition to war only when they might have to go, especially those who later went back to a love of war when the draft expired.

The only reason that you believe that I am a liberal is because my main interest is in economics and it has been dominated for more than thirty years by conservative philosophy that has operated for much too long. Long enough that like a dead fish it is starting to stink and to rot.

And the only reason that we maintain these policies is because they make the rich richer. The theoretical support for maintaining these policies is based on the ridiculous idea that there is the possibility of a self-regulating free market. Which is the naturally occurring form of capitalism which is nearly perfect but which has never been seen because everywhere, in all of history, evil government has prevented it.

And the reason the banks would foreclose at a greater loss is that they don't have to foreclose on everyone. Most people still make their payments. Suppose the math is write down an average of $20k or foreclose on 1 in 10 at a $50k loss. You're seeing $20k < $50k but really it's $20k * 100% vs $50k * 10%.

Wow, a genius idea. We will only foreclose on the people who don't make their payments, not on everybody. Why didn't I think of that?

Loren, if you think that I am an idiot just come out and say it.

What I'm saying is that you missed part of the picture.

I think that I understand this pretty well. Certainly better than someone who believes that banks and banking can be short of something, money, that they can create out of thin air. Especially someone who believes that the banks should be less regulated or unregulated, free banking. Making it much easier for the banks to create more money.

Or am I misreading you? Did you cry for more regulation before 2008? Do you now believe that we need more regulation of banks and the financial markets in general? Or are you still part of the problem?

Obviously, you would only write down the mortgages of the people who can't afford the payments but who can afford the payments resulting from the valuation at the current market price. The bank can't get any more money for the house than the current market price anyway, plus they will have more expenses involved in selling the home. The one problem was that the banks wanted to maintain the fiction of a higher value for the home to improve the appearance of their balance sheets if not their reality. And the overall economy and the nation suffered because of it.

I am sorry, as usual I wrote too much considering that this is a short attention span forum.

 

[Loren Pechtel]

What's the point? Failed banks are sold off cheap because that's all they're worth. Absorbing them would produce no more value.

You may not understand the concept of value. Typically failed banks aren't sold, they are given to a stronger bank who assume the failed banks liabilities and their assets. . The few exceptions are like the failure of Washington Mutual, the largest bank failure in the nation's history. WaMu had about thirty billion dollars in bad loans, about 10% of their assets. So on their books they were worth about 270 billion dollars. JP Morgan paid the government about two billion dollars for the entire chain of banks. This is from memory, don't hang me if I missed a billion dollars or two. What was their value? Two billion dollars? Or more than two hundred and fifty billion dollars?

As you say--assets minus liabilities. If a bank is insolvent these numbers will be similar or even in the hole.

And if they only paid $2B for it why do you assume it was worth $270B??? If it really were somebody else that would have offered $3B would be screaming.

Because their solvency is based on the ability to meet their obligations, which depends on the market value of the asset in a market where certain categories of asset prices are depressed. What's the market value of something you can't find a buyer for?

The value to the purchaser involves the longer-term value of the asset, which is a different (generally higher) figure. It depends on its ability to produce an income stream.

What happens in a distressed market is that the market value of assets dips, because more people are selling them, and fewer people are able to buy them. The assets themselves, however, are generally income streams, and are no less valuable than they were already. That's why a bankruptcy or fire sale is a good time to pick up bargains.

There's enough money floating around. If they really were going for 99% off there would be plenty of buyers. While it's not exactly his thing Warren Buffet would probably buy them at that kind of discount--and he certainly could have come up with the money. He's well known for taking the long view on the value of things.

Google "Bank bailout." It will help your memory. Get back to me when you have figured it out.

In other words, we all pay. The usual liberal game--the responsible pay for the irresponsible.

Seems odd to blame them, when it was the conservatives who dropped the rules preventing them from being irresponsible in the first place, and supported the bailout that you're blaming on liberals.

No, I'm saying your proposal is another example of making the responsible cover the errors of the irresponsible.

 

[Loren Pechtel]

Why do you believe that a national bank would be a small bank? So small that it would be unable to influence consumer interest rates?[

It's going to be small potatoes compared to the size of the force needed.

Obviously the national bank would be national and offer loans at lower rates than the private banks, if they wanted to lower the interest rates on a class of loans, say consumer retail credit, credit cards. If they offered a lower rate and better terms to customers then why do you think that they wouldn't get the customers.

Then they would bleed red ink. No thanks.

Reading ahead maybe I am assuming too much about your understanding of banking.

Banks are allowed by the government that charter them to make money out of thin air. There is never a question of a bank not having enough money. This is why the key to having a stable banking system is to regulate and control them to make sure that they can't abuse this ability to make money out of thin air.

You're the one with the inadequate understanding of banking. No bank can lend out a dollar it does not have. What you are referring to is that dollar that they lend soon gets deposited again, now they have another dollar to lend (minus the capitalization reserve, thus only 92 cents at present.)

The predatory lender's profit isn't in the interest that they receive but in the asset that they acquire when the borrower defaults on the loan. Since everyone knew that homes not only never lose value but in fact their value always increases the banks would be getting a home that was worth much more than the mortgage amount. It was the perfect plan, as long as home values never went down. When home values dropped the result was the GFC.

No. The bankers weren't after the houses. The problem was that the people writing the loans weren't the ones taking the losses. They wrote pigs, slapped some lipstick on them and resold them.

Of course, the banks couldn't have become predatory lenders if the regulators had enforced the banking regulations. But they didn't because the regulators truly believed that the banks and the financial markets could regulate themselves. That they would never be so stupid as to risk their own long term viability for short term profits. The regulators were wrong.

Bush believed this.

It is common for the anti-regulation apologists like you to blame the borrowers for the problems. That is the borrowers responsibility to make sure that they can pay back the loans, and certainly it is for their own financial security. But we have ample evidence over hundreds of years that we can't rely on this restraint over the whole economy to maintain stability in the banking system. That is why we have entrusted banks with this simple job of making sure that the borrower can pay back the loan.

If the loans weren't being resold there wouldn't have been a problem.

I may have over estimated your math skills.

No, I followed your math. My $3 billion was simply a bid above the $2 billion you said it was sold for, it wasn't based on their valuation.

Their problem was liquidity. The bad loans were an immediate, pressing problem with cash flow, their assets represented money tied up in illiquid, long term loans. In more normal times they would have been able to sell some of their assets to improve their liquidity, their cash flow, but there was not anyone buying loans because the entire banking business was in question. No one knew how far the rot from the mortgage backed securities fiasco went.

While that would cause the collapse it doesn't explain the low selling price. I've already addressed this in another message, I'm not going to repeat myself.

Or am I misreading you? Did you cry for more regulation before 2008? Do you now believe that we need more regulation of banks and the financial markets in general? Or are you still part of the problem?

I didn't address the problem one way or another--I didn't realize how badly asleep at the job they were.

Obviously, you would only write down the mortgages of the people who can't afford the payments but who can afford the payments resulting from the valuation at the current market price. The bank can't get any more money for the house than the current market price anyway, plus they will have more expenses involved in selling the home. The one problem was that the banks wanted to maintain the fiction of a higher value for the home to improve the appearance of their balance sheets if not their reality. And the overall economy and the nation suffered because of it.

I am sorry, as usual I wrote too much considering that this is a short attention span forum.

The reality is that they can get more in most cases: Market value plus the value people put on their credit. People would only do a strategic default if the amount owed was well above market price--and then only if they were in a non-recourse state.

 

[Lumpenproletariat]

Why do we have to suppress interest rates? What's it really all about?

Okay, I will answer your question of "why don't we let supply and demand set the interest rates?"

The short form answer is,

Because no part of "supply and demand for money can set the interest rates" is true, supply and demand can't set the interest rates.

This is just circular reasoning. Your argument is that supply-and-demand cannot set the interest rate because supply-and-demand cannot set the interest rate. You can't use your conclusion as the premise for your argument.

What does "no part" mean? Doesn't one single borrower's demand add its share to the total demand and thus to the total demand for money in the economy?

And doesn't one single person's savings add to the supply by a small increment? Isn't the total market supply and demand always the total of all the individual demands and supplys in the market, so that each buyer and seller is adding a tiny increment to that total?

Why isn't this just as true for interest rates as it is for any other price? Why can't supply-and-demand, as the sum total of all the individual supplys and demands, determine the market price for borrowing money just as it does for all other prices?

So why don't the same rules of supply-and-demand apply to credit and interest as apply to other buying and selling?

(Do you claim that supply-and-demand also doesn't apply to the price for potatoes or TVs or cars or bananas or anything?)

You accept that supply and demand can set interest rates on pure faith.

And you accept it on pure faith that supply-and-demand cannot set interest rates. The difference is that my "faith" is based on experience and reason, whereas your faith is based on an ideological commitment to suppressing interest rates because it promotes "jobs! jobs! jobs! jobs! jobs!"

I know of cases where the interest rate was higher because of supply-and-demand.

I loaned my nephew money at a rate higher than 100%. It was only because he was desperate (demand) that such a high rate was possible. And I know of other cases. For example, people reducing their borrowing or their credit buying because the rates were getting too high.

This is knowledge, or experience, not faith. Although there is nothing wrong with "faith" that is based on experience and common sense and reason, which is the only kind of "faith" this is.

For you to be right, you must claim: "No lender was ever able to take advantage of tight supply conditions as a means to increase the interest rate." And you must deny that payday loan companies exist, which charge high interest because the borrowers are desperate.

You have to deny that high-interest loans ever happen if you claim that supply-and-demand cannot set the interest rates. And yet they do happen, as there are many cases where lenders charged higher rates because of decreasing supply and desperation by borrowers.

Because a lot of people have this same blind faith you don't question it.

It's not "blind faith" but a common-sense observation based on experience. These people know of cases where the interest rate went higher because of lower supply, and also where the interest rate went lower because demand decreased or because the supply increased.

Out of desperation (demand) some people have actually paid a higher interest rate who would not have if they hadn't been so desperate. What is there to question? Did I only imagine that I loaned that money to my nephew at "usury" rates? I'm supposed to disbelieve every memory I have? It's "blind faith" for me to believe that my memory is correct?

Unlike you, there are people who can't accept things on pure faith.

You are demanding "pure faith" from me that supply-and-demand cannot determine the interest rate. Why don't you give me a reason instead of demanding that I have pure faith in you? Why do you keep insisting that I have to believe you only because you say it?

I keep asking you for reasons and you don't give me any.

My reason is that supply-and-demand does obviously affect all prices for virtually everything, and so it's reasonable to assume it has the same effect on interest rates. You don't deny supply-and-demand applies to virtually all other prices, so why doesn't it also apply to interest rates? You insist dogmatically that it does not without giving any reason.

If you cannot give any reason or evidence for this, but only keep asserting it as an article of faith, why should I adopt your religion or blind faith that supply-and-demand does not apply to interest rates just as it applies to all other prices in the market? Why should I have blind faith in your dogma which contradicts my experience and that of so many others who saved or borrowed and made decisions based on supply-and-demand?

They have to understand how things work. They have to explain how things work.

Why can't you explain how it works? how interest rates are different than all other prices in the market and cannot be set by supply-and-demand? Why do you keep pretending to "understand" how things work but cannot explain it?

I explained to you above how demand and supply has caused the interest rate to be higher or lower in some cases. And if thousands or millions of similar cases are added together, it can impact on the overall interest rate throughout the economy. If the number of borrowers greatly increases so that some of them become desperate, why cannot the lenders become more stingy and increase their rate and make a higher profit from the desperate borrowers?

Unlike you they are willing to expose their faith to reality.

What is the "reality" you're talking about?

What's not real about the number of borrowers increasing? You never heard of there being an increase in the number of people who want to borrow? How does that increase not then provide an opportunity to lenders to increase their rate? If the lenders have only so much money available to lend out, why doesn't the increase in the number of borrowers not then enable the lenders to increase their rate? If instead they keep their rate low, despite the higher demand, isn't that likely to attract more borrowers and cause them to run out of available money quicker? How does your money not run out sooner if you pay more of it out in loans to borrowers?

Why isn't this scenario a part of reality? Do you mean that if the amount loaned out increases, and all other variables remain the same, the total supply of money remaining to be loaned out is still the same as if the amount loaned out does NOT increase? Do you mean that if an increased amount of it is subtracted from the total, the remaining supply is the same quantity as it would have been if that amount had NOT been subtracted? Do you mean that 4 - 2 = 4? I must accept that or I'm not exposing my faith to reality? How is 4 - 2 = 4 reality? Why should I expose my faith to the reality that 4 - 2 = 4?

What is not reality about a lender having more to lend, or more supply still remaining, if the amount he holds decreases by a lesser amount? What is not reality about that lender charging a higher rate if the amount/supply he has available to lend out is a smaller amount rather than a larger amount?

Why is it not reality that interest rates are subject to supply-and-demand in the same way that other prices are? Are you saying that NO prices are subject to supply-and-demand? that supply-and-demand is totally "blind faith" and has nothing to do with reality or with anything that is bought and sold?

Why is it "blind faith" to doubt what you are saying? To not bow down to your pronouncements is "blind faith"?

Many people have tried to explain how supply and demand would set interest rates. They have tried to come up with a theory for the proposition that you blindly accept.

How am I "blindly" accepting this anymore than I blindly accept that 2 + 2 = 4? or that if I pay a higher price I will have less money left over than if I pay a lower price?

What's wrong with the "theory" above? How does an increase in the number of borrowers not allow the lenders to increase their rate? Don't these lenders increase their profit if they increase the rate during a period when the number of borrowers increases? How is it "blind" to believe this when I'm asking you to disprove it and you cannot?

They haven't succeeded.

How does the above theory not succeed? How is it not the case that a lender can charge a higher interest rate if the number of borrowers increases?

Every theory is filled with holes. Every assumption has been refuted.

What is the "hole" in the above theory? Refute the proposition that a lender can charge a higher rate if the number of borrowers increases.

Or also the theory that if the borrower is more desperate, and other loan sources are unavailable, a "greedy" lender could increase the rate in order to gain more profit than would be possible if the borrower could find a cheaper source? i.e., my personal example of charging my nephew "usury" rates because he was so desperate? What's the "hole" in that? How is that example "refuted"?

Unfortunately the arguments against what you unquestioningly have accepted are numerous.

Then why can't you give one argument? Disprove my claim that I was able to charge my nephew a higher rate because of supply-and-demand. Or other cases where someone had to pay a higher rate because of the higher demand and lower supply.

We are talking about the real world and the very complex economy, not some fantasy economy based on the self-regulating free market.

You mean in the "real world" I did not actually loan this money to my nephew? Did I only imagine it? How was this not a real loan in the real world which brought me a real interest rate?

And of course there are millions of other examples of such loans that took place in the "real world" -- Can you refute all these and prove that supply-and-demand had no role in setting the interest rate higher or lower in all these millions of cases? Can you prove that rate would have been the same anyway, regardless of the supply-and-demand conditions?

Do you claim that my nephew would have borrowed this money from me anyway, even if he could have borrowed it from a bank or other source at 1/10 the rate I charged him? Why would he do that? Why should I believe he would have done that?

And you don't even seem to understand the fantasy.

You mean my memory of lending that money to my nephew is only a "fantasy"? It didn't really happen?

It will be hard to explain the reality to you.

Yes, it will be hard to prove to me that my memory of this is false. And of course there are millions of other anecdotes that others have, or memories people have of lending and borrowing where the supply-and-demand conditions clearly caused the rate to be higher or lower. It will be hard for you to explain how all the experiences of those millions or even billions of people never really happened and are "fantasy" and not a part of "reality" because your dogma overrides what they remember.

So I will list some of the reasons why supply and demand can't set interest rates. . . .

*Banks aren't dependent on deposits in order to make loans.

You mean if they had no deposits at all they would still make the same loans? or their ability to make loans is not increased if their deposits are greater?

You mean more deposits does not mean a higher supply? or if the supply becomes much greater, that's no incentive for them to reduce the interest rate? even if it means they would earn greater profit by reducing the rate and attracting more borrowers? This can't happen? How do you know?

If it does happen, doesn't that lead to more borrowers > higher profit to lender = reward for lowering the rate? And if so, then didn't supply-and-demand help set the interest rate in that case (i.e., higher supply = lower rate)? And even if there are other factors, isn't it still true that supply, or total amount of deposits, is also a factor? How is it not a factor in setting the rate if the higher supply induced the lender to lower the rate?

If you say no -- deposits are irrelevant to interest rates and are not a factor in lending -- you must show that a bank having no deposits at all would lend just as much money as a bank having deposits, and also that it would charge the same interest rate. Is that what you claim? a bank with NO deposits lends out just as much as one with deposits, and at the same interest rate?

*The banking system creates new money in response to the demand for money.

How does this translate into interest rate not being set by supply-and-demand? If the demand for money is higher, won't the bank charge a higher interest rate? or lower rate if the demand is lower? Or if their ability to create new money is more restricted (less supply), doesn't this mean they will charge a higher rate?

So far you're not giving any reason why interest rate cannot be set by supply-and-demand. Just because you can name other factors that affect interest rates does not change the fact that higher supply/lower demand > lower rate and lower supply/higher demand > higher rate. The same as with all other prices. The burden of proof is on you to show why this rule does not apply to the price for credit.

*Because the demand for credit creates money there has to be an external force to prevent the extremes of over optimism and over pessimism and the resulting over and under production of money respectively.

Does this mean the interest rate cannot be set by supply-and-demand? Why? If some artificial external pressure is necessary, i.e., regulation in some form, why does this have to be in the form of artificial interest rates set by the central bank? Even if the regulation has the indirect effect of pressuring rates up or down, why is there any need for the central bank to directly set a target interest rate figure as the Fed does?

You're just giving a factor that might also affect interest rates, but that doesn't negate the effect that supply-and-demand also has on interest rates.

*Whether or not to invest is based on projected sales, revenues, projected profits, etc., not interest rates.

You mean if the interest rate is 1%, the investment decisions would all be the same as they would be if the rate were 20% or 30%? What if the interest rate goes up to 100%? They would still invest the same? A very high interest rate never discourages any investing?

Just because there are other factors determining whether or not to invest does not change the fact that the interest rate is also a factor that an investor or borrower considers.

*The herd instinct means that human factors are pro-cyclical, there has to be an external, counter cyclical force.

How does this translate into supply-and-demand not setting interest rates?

If too many people are borrowing, because "everyone else" is borrowing, i.e., high demand, then won't interest rates go up so lenders can make extra profit off this excess borrowing? Why not? If they're greedy and want to maximize their profit, why wouldn't they increase their interest rate in order to take advantage of this extra demand due to herd instinct? You mean the lenders are not "greedy"? They don't want higher profit?

Your basic principle is that lenders do NOT want more profit?

Or if too many people are contracting and only saving or paying down debt and not borrowing, because that's what "everyone else" is doing, don't lenders then have an incentive to reduce their rates in order to entice some of them to borrow? Why wouldn't they do this if they have extra money to lend and could gain more profit by finding more borrowers?

*Savings is not deferred consumption or deferred productive investment, modern financial markets provide options to either.

What does this have to do with supply-and-demand or interest rates? A definition of "savings" is not necessary here. You're supposed to be giving us reasons why interest rates cannot be set by supply-and-demand.

*Savings has its own value for the saver beyond the interest they receive, it expresses his desire to have readily available money, liquidity.

No one said interest is the only goal or motive for saving. Just because there are other motives for saving does not negate the fact that supply-and-demand contributes to setting the interest rate and that a higher interest rate will attract some increased savings.

*Savings is money withdrawn from the economy.

Giving a definition of "savings" doesn't tell us whether interest rates can be set by supply-and-demand.

*Savings financial instruments have no costs of production, they have an infinite supply potential.

Weren't we talking about the "real world"? Are you saying that in the "real world" lenders have an infinite supply of money and can lend a trillion quadrillion dollars raised to the quintillionth power if they choose?

You said "I will list some of the reasons why supply and demand can't set interest rates." These are your "reasons"? This is the best you can offer?

*A large stock of money is tied up in the secondary financial markets, the money for capital investment might come from this money stock and not represent a change in the time preference, only a change in liquidity.

This could reduce the demand for loans and thus the interest rates, but it doesn't mean interest rates cannot be set by supply-and-demand.

Why aren't you giving a straightforward answer why supply-and-demand can't change interest rates? Why are you dancing around all over and not answering this question you promised to address when you said: "I will list some of the reasons why supply and demand can't set interest rates."? When will you stop meandering all over the place and finally give these reasons you said you would?

*The money in the secondary markets can quickly be shifted to either consumption or to productive investments.

It could also be shifted to savings. It might impact supply-and-demand, but it doesn't mean interest rates are not set by supply-and-demand. Just because things shift from one place to another doesn't mean supply-and-demand is not affecting the prices.

*Money is not a commodity, it is not subject to substitution, if you need money nothing else will do, no matter what its cost is.

On the contrary, there are substitutes if the cost of money becomes too high or the interest rate is too low. One instead can save up assets and then barter these instead of using money. One can accumulate commodities and use these in place of money. This substitution possibility helps prevent the cost of money from going too high. Money could "price itself out of the market" if the cost of it goes too high.

You can argue that factors prevent its cost from going too high, but not that "it is not subject to substitution, if you need money nothing else will do, no matter what its cost is." That is false. Some investors put their savings into something other than money, which means they are substituting something else for money. And no matter what they "need money" for, there are other substitutes for it that they can turn to if the cost of the money goes too high.

*The so-called market for savings and investment to possibly set interest rates, the buyers who want money and the sellers, the savers, are insulated from one another by a third party, the banks, who are not neutral in the exchange.

And how does a "third party" or middleman or broker negate the supply-and-demand element? An antique dealer, a real estate agent, a ticket-scalper, a coin dealer, etc. -- these insulate the sellers and buyers from one another and are not neutral in the exchanges. So does this mean the prices paid to these third parties are not determined by supply-and-demand? How is that?

Why can't the interest rate a bank charges be set by supply-and-demand just as much as the prices paid to these brokers are set by supply-and-demand?


The above is your complete list of alleged "reasons why supply and demand can't set interest rates."

You're on a roll -- "O" for 13.

Don Rumsfeld turned up more WMDs in Iraq than you've given reasons why supply-and-demand can't set interest rates.


Of course the answer to the question is: "JOBS! JOBS! JOBS! JOBS! JOBS! JOBS!"

That's all there is to it, nothing more. Bridges to nowhere, makework, corporate welfare, whatever it takes. It's all about creating BABYSITTING SLOTS for all the scum -- to get them off the streets.