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I really don't know if this is correct or not, but one thing I've heard is that low rates disincentivize lending by banks because loans are less profitable. Hi
by 01100011 5y ago
I really don't know if this is correct or not, but one thing I've heard is that low rates disincentivize lending by banks because loans are less profitable. Higher rates will actually encourage lending. Much of the money in circulation comes from the banks because of fractional lending and not from the fed's printing presses. I'm curious if anyone has a take on that.
Also, I think rates need to be looked at in comparison to GDP growth. High rates are fine when GDP growth is greater. If rates shoot higher because the fed is trying to stop runaway supply-side driven inflation while GDP growth is low it could easily kick off a depression.
- listenallyall 5y agoSpreads compress when rates are low, so yes, loans are less profitable per dollar when rates are low. But many more people and companies want to borrow so banks make out fine. And there are plenty of other financing sources available for companies, including issuing equity, VCs, junk bonds, which grow in popularity when investors need to chase yields.
- sokoloff 5y agoHigher rates increase willingness to lend. Lower rates increase willingness to borrow. You need both a willing lender and a willing borrower for lending to happen.