Re: Re: Re: Current (heterodox) thinking oninterestrates?

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

> CB: In general, I think of bankers wanting high interest rates for the
> obvious reason that it is the price of money ( which they "sell" in
> loans). I think they are this much "in your face" at one level, but I can
> see that this simple profitmaking would be contradicted by other factors
> effecting them in the context of recessions that high interest rates induce.

again, they also borrow money, so they care about the _spread_.

> CB: The Fed sets the rate at which it lends to the ??? What is the
> relationship between the Fed rate and the spread ?  Also, aren't most of
> the banks' revenues not from their borrowing ?

The Fed sets the discount rate, the rate at which it lends to banks. It has
enough power over money markets to keep the "Fed Funds" rate on the target
they choose. (That's the rate on loans between banks for very short
periods.) The "spread" can refer to any gap between two interest rates.
Here I'm talking about the gap between deposit rates (close to zero these
days) and loan rates.

The spread can and does change over time. It mostly changes due to supply &
demand, specifically due to changes in expectations of future inflation,
risks, etc.

Banks make profits from other things, like from running trust accounts,
underwriting investments, etc. I don't know the percent of profits that
comes from such "off-balance-sheet activities," but Mishkin says that the
income coming from these has doubled as a percentage of assets since 1979.

> CB: My contradiction on this is, don't monopolies foster inflationary
> pricing ?

Monopoly power encourages inflationary persistence, as when inflation
continued in the face of the early 1970s recession (that's just the
clearest case). However, the US economy has become much more competitive
during the last 20 years.

> Is this a contradiction between big banks and other big companies ?

This is a big question, so I'll avoid it.

Jim Devine jdevine@xxxxxxx &  http://liberalarts.lmu.edu/~jdevine