The effort to use low interest rates to re-energize the economy may be backfiring, warns a study from the National Bureau of Economic Research (NBER).
The Federal Reserve’s long-running loose monetary policy — including multiple rounds of quantitative easing and Operation Twist is designed to encourage banks to lend.
Yet it might be doing the opposite, Fortune reports.
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4 comments:
This is unfortunate,but long overdue.Even a complete market index fund is averaging 12% per year.Why would banks rush to offer dirt cheap loans for as low as 3%?Whenever a more profitable venture surfaces the general public will be thrown under the bus.
Banks are using the cheap money to recapitalize. They still aren't healthy, so they really don't want to lend like they used to.
A lot of that money is going to prop up US Treasury prices. Borrow at .25%, help drive down the US Gov't price of lending by purchasing a bond at 2%. This is a dangerous game, as once interest rates go up the bonds themselves will be deep underwater. Selling them before maturity would create a huge loss and make them more unhealthy. So they are stuck holding them as long as possible. I wouldn't be surprised to see bailout money in the system for 10 years because of this.
Since Glass-Steagal was repealed, banks can now invest in the stock market, too. As the above commenter said - the returns are good in the market right now. And in many ways it's less risky than investing in a small business.
The only lending banks want to do is credit cards, where they can pull in 18% - 24% rather easily. At least they are offering long promo periods - it's not unheard of to get 18 months at 0% if you have great credit. You're a safe risk (ie, good debt slave), and the swipe fees pay for the interest on the bailout money. Plus there's a chance of making huge profits on the back end with high interest rates or fees.
This situation will never get better until the artificial market that we deal with goes through a legitimate correction based on economic reality.
I was told that lending less than 1.5 million to a small business was'nt worth it to them because they lose money.
The problem with these great low rates is the loans are super restrictive now, with more money required up front, more than perfect credit record and small print that does'nt come up until later in the negotiations. You get the feeling afterwards the so-called qualified ones don't really need to borrow the money.
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