4 ms·
Why were bond interest rates ever that high in the first place?
by viburnum 6y ago
Why were bond interest rates ever that high in the first place?
- freeone3000 6y agoThe overnight lending rate in 2007 was 5.5%. If that was the cheapest possible you could ever borrow money for even the shortest term, 6% for a long-term bond is downright cheap.
- viburnum 6y agoRight, why was that the overnight lending rate?
- freeone3000 6y agoThe federal reserve sets this rate directly. They chose it to be at 5.25% (correcting my error in the above) because the economy was going well, we had less than 5% unemployment, and a high rate was generally considered necessary to fight inflation. https://www.federalreserve.gov/newsevents/pressreleases/monetary20070321a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... is their statement.
- viburnum 6y agoThat's really cool you looked up the press release! Yeah, that's right, the central bank sets the rate. But the government could have managed inflation by other means, by regulation, raising taxes (perhaps on those who could most easily pay them), cutting spending, or adjusting trade policy, rather than giving investors 5%/year for doing no work.
- freeone3000 6y agoYou seem to have the purpose of rate increases reversed. Low interest rates actually help investors more. You're able to trade on margin for cheaper, which is the real driver of large investment firms. The rate is raised when you want money to leave the system.
- viburnum 6y agoFinancial institutions (such as hedge funds) borrow money for leverage but the rentier class as a whole are creditors. Raising rates pulls money out of the system but it also gives money to rentiers.