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Why is there some bureaucrat in an office deciding how much my money gains or loses today? How else would interest rates be set? If you want your money to grow

Why is there some bureaucrat in an office deciding how much my money gains or loses today? How else would interest rates be set? If you want your money to grow all by itself just because you deposited in an account with an interest rate, how does that interest rate get decided if not by someone in an office? Someone, in an office, whatever tools they use to decide, has to make that decision, surely.

wongarsu 7y ago
The maximum interest rate at which the bank is (nearly) guaranteed to make profit off my account balance can be calculated by an algorithm. Running that algorithm once a month and using it to set the bank's interest rate would be an interesting model that doesn't directly involve humans.
- JumpCrisscross 7y ago
  > The maximum interest rate at which the bank is (nearly) guaranteed to make profit off my account balance can be calculated by an algorithm This is a good way to blow up a bank.
  - wongarsu 7y ago
    I'm not saying the algorithm is trivial, as it has to take long-term factors into account, as well as the reaction of the market to the new interest rate, and of course add safety and profit margins. It would be quite a bit of work, but it's well aligned with the core-competency of banks.
    - JumpCrisscross 7y ago
      > It would be quite a bit of work, but it's well aligned with the core-competency of banks It is, and it’s difficult. Perhaps fundamentally impossible, given it would have to predict consumers’ tastes and preferences to estimate B2C companies’ creditworthiness. Rates are negotiated instruments, a combination of the return on safe assets today, the risk of that rate changing tomorrow, and the credit profile and availability of borrowers. There is no known algorithm which can robustly balance these variables. If it were discovered, it would be worth billions, perhaps more, and fundamentally change finance. Pretty much every crisis has a story about smart people thinking they’ve solved this problem in some narrow niche of the economy and then being shown disastrously wrong.
      - big_chungus 7y ago
        > Perhaps fundamentally impossible It can't be done by one individual for the whole market, but the invisible hand does a pretty good job. The principle of a market as a whole establishing prices, rates, etc. is widely accepted.
- QuesnayJr 7y ago
  If you calculated that interest rate, it would be negative. Ten-year German bonds have a negative interest rate. Cash savings pay less than bonds, so money in a cash account pays an even-more negative rate. The only way banks could pay a higher interest rate would be to bear more risk, but that's how you get a banking crisis.
maxerickson 7y ago
Do they mean public official? Lots of interest rates are influenced by markets, where lenders and borrowers base their activity on available rates (if no one borrows at a given rate, a lender may seek business by reducing the rate...).
mruts 7y ago
Interest rates in the US are not set directly by the government. Instead the federal funds rate is a target rate that the Fed aims for by either expanding or contracting the money supply. Also the TIBOR and LIBOR and all the other *IBORs aren’t set by the government either. Certainly government monetary policies affect these rates, but ultimately it’s a free market function. Having the government directly set private lending rates is a very bad idea and would certainly result in disaster (much like how all other price controls are terrible ideas).
- blake1 7y ago
  Very short term interest rates in the US are set by the Fed, pretty much at will. Under normal conditions, they have an extremely strong influence on medium term interest rates as well by convincing the market that they will keep short rates high(low) in the future, while will then raise(lower) medium terms rates. If that proves inadequate, like it did after the crisis, the Fed can buy and sell bonds directly to move medium to long-term interest rates. The Fed may have a historical preference for relying on the first mechanism alone, but through some combination of these techniques, they can set any interest rate to any reasonable value almost at will.
  - mruts 7y ago
    Sure all of that’s true, but I think there’s a big philosophical and moral difference between changing the incentives of bankers vs forcing them to lend and borrow at a set rate. One relies on an efficient market and incentives while the other relies on coercion and force. It’s possible that the result of both of these systems are equivalent in many situations, but one is much more robust than the other because it still allows for price competition.
big_chungus 7y ago
> How else would interest rates be set? By a free market, the same way it was set for a very long time. It gets decided by how many people borrow at a given rate, which will typically raise or lower the rate. Some one will make small adjustments around the broader market rate; if enough people make those small adjustments in one direction, the range moves.
- QuesnayJr 7y ago
  I'm not quite sure what you have in mind, but in a free market, interest rates in Germany would now be negative. People are demanding government action to prevent it.

wongarsu 7y ago

The maximum interest rate at which the bank is (nearly) guaranteed to make profit off my account balance can be calculated by an algorithm. Running that algorithm once a month and using it to set the bank's interest rate would be an interesting model that doesn't directly involve humans.

JumpCrisscross 7y ago
> The maximum interest rate at which the bank is (nearly) guaranteed to make profit off my account balance can be calculated by an algorithm This is a good way to blow up a bank.
- wongarsu 7y ago
  I'm not saying the algorithm is trivial, as it has to take long-term factors into account, as well as the reaction of the market to the new interest rate, and of course add safety and profit margins. It would be quite a bit of work, but it's well aligned with the core-competency of banks.
  - JumpCrisscross 7y ago
    > It would be quite a bit of work, but it's well aligned with the core-competency of banks It is, and it’s difficult. Perhaps fundamentally impossible, given it would have to predict consumers’ tastes and preferences to estimate B2C companies’ creditworthiness. Rates are negotiated instruments, a combination of the return on safe assets today, the risk of that rate changing tomorrow, and the credit profile and availability of borrowers. There is no known algorithm which can robustly balance these variables. If it were discovered, it would be worth billions, perhaps more, and fundamentally change finance. Pretty much every crisis has a story about smart people thinking they’ve solved this problem in some narrow niche of the economy and then being shown disastrously wrong.
    - big_chungus 7y ago
      > Perhaps fundamentally impossible It can't be done by one individual for the whole market, but the invisible hand does a pretty good job. The principle of a market as a whole establishing prices, rates, etc. is widely accepted.
QuesnayJr 7y ago
If you calculated that interest rate, it would be negative. Ten-year German bonds have a negative interest rate. Cash savings pay less than bonds, so money in a cash account pays an even-more negative rate. The only way banks could pay a higher interest rate would be to bear more risk, but that's how you get a banking crisis.

maxerickson 7y ago

Do they mean public official? Lots of interest rates are influenced by markets, where lenders and borrowers base their activity on available rates (if no one borrows at a given rate, a lender may seek business by reducing the rate...).

mruts 7y ago

Interest rates in the US are not set directly by the government. Instead the federal funds rate is a target rate that the Fed aims for by either expanding or contracting the money supply. Also the TIBOR and LIBOR and all the other *IBORs aren’t set by the government either. Certainly government monetary policies affect these rates, but ultimately it’s a free market function. Having the government directly set private lending rates is a very bad idea and would certainly result in disaster (much like how all other price controls are terrible ideas).

blake1 7y ago
Very short term interest rates in the US are set by the Fed, pretty much at will. Under normal conditions, they have an extremely strong influence on medium term interest rates as well by convincing the market that they will keep short rates high(low) in the future, while will then raise(lower) medium terms rates. If that proves inadequate, like it did after the crisis, the Fed can buy and sell bonds directly to move medium to long-term interest rates. The Fed may have a historical preference for relying on the first mechanism alone, but through some combination of these techniques, they can set any interest rate to any reasonable value almost at will.
- mruts 7y ago
  Sure all of that’s true, but I think there’s a big philosophical and moral difference between changing the incentives of bankers vs forcing them to lend and borrow at a set rate. One relies on an efficient market and incentives while the other relies on coercion and force. It’s possible that the result of both of these systems are equivalent in many situations, but one is much more robust than the other because it still allows for price competition.

big_chungus 7y ago

> How else would interest rates be set? By a free market, the same way it was set for a very long time. It gets decided by how many people borrow at a given rate, which will typically raise or lower the rate. Some one will make small adjustments around the broader market rate; if enough people make those small adjustments in one direction, the range moves.

QuesnayJr 7y ago
I'm not quite sure what you have in mind, but in a free market, interest rates in Germany would now be negative. People are demanding government action to prevent it.