“Easy” question about interest rates

[poorgradstudent]

Ok, so this has been bugging me lately.

We’re in a credit crunch. There just isn’t enough money floating around in the big pool, right? On top of that, inflation is soaring.

So why aren’t interest rates on CDs and savings accounts higher? As supply falls, prices go up, this is economics 101. So shouldn’t banks be willing to pay me more for my savings now than a year ago?

I’m guessing this is related to the federal funds rate somehow. But this is where my understanding falters, and I’d love a more informed explaination.

[HarryBosch]

First off, I’m not an economist nor a financial service professional so I can only offer up my uneducated opinion.

I thought that – traditionally – Savings and Loans, Banks, Thrifts, etc. would take the savers money and then reloan it out at a higher rate. That way they pay the saver a lower rate of return and then make their profit.

So if lending standards are tightened then they can’t lend out as much money due to fewer people qualifying. Then they would have to keep the savers rates lower than in good lending times. IMO.

[HarryBosch]

First off, I’m not an economist nor a financial service professional so I can only offer up my uneducated opinion.

I thought that – traditionally – Savings and Loans, Banks, Thrifts, etc. would take the savers money and then reloan it out at a higher rate. That way they pay the saver a lower rate of return and then make their profit.

So if lending standards are tightened then they can’t lend out as much money due to fewer people qualifying. Then they would have to keep the savers rates lower than in good lending times. IMO.

[HarryBosch]

First off, I’m not an economist nor a financial service professional so I can only offer up my uneducated opinion.

I thought that – traditionally – Savings and Loans, Banks, Thrifts, etc. would take the savers money and then reloan it out at a higher rate. That way they pay the saver a lower rate of return and then make their profit.

So if lending standards are tightened then they can’t lend out as much money due to fewer people qualifying. Then they would have to keep the savers rates lower than in good lending times. IMO.

[HarryBosch]

First off, I’m not an economist nor a financial service professional so I can only offer up my uneducated opinion.

I thought that – traditionally – Savings and Loans, Banks, Thrifts, etc. would take the savers money and then reloan it out at a higher rate. That way they pay the saver a lower rate of return and then make their profit.

So if lending standards are tightened then they can’t lend out as much money due to fewer people qualifying. Then they would have to keep the savers rates lower than in good lending times. IMO.

[HarryBosch]

First off, I’m not an economist nor a financial service professional so I can only offer up my uneducated opinion.

I thought that – traditionally – Savings and Loans, Banks, Thrifts, etc. would take the savers money and then reloan it out at a higher rate. That way they pay the saver a lower rate of return and then make their profit.

So if lending standards are tightened then they can’t lend out as much money due to fewer people qualifying. Then they would have to keep the savers rates lower than in good lending times. IMO.

[cr]

I’m no expert, but I think there actually is money floating around which is what gives us rampant inflation, but banks don’t want to lend as much as they did prior, and the mortgage heavy ones are scrambling to raise capital. Coincidentally it’s those banks that pay higher rates on CDs, but still nothing much over 4%.

Which brings it back to the Fed. You’re basically right in them being a big (if not entire) cause of it and the weak dollar high inflation recipe for recession, because banks aren’t going to pay that much more to borrow your money if they can borrow from Helicopter Ben. They’re probably only borrowing at this point to survive, instead of funding thousands and thousands of Alt-A and subprime mortgages and furthering consumer debt.

I think the true cause of the entire mess is people have been spending more money than they could afford for too long. Now that revolving debt is catching up to itself and banks are making it more costly to borrow to make up for their losses, but the Fed thinks it’s easy money is still the answer.

I don’t know how much that helps, and I’m sure many here can answer your question better than I.

[cr]

I’m no expert, but I think there actually is money floating around which is what gives us rampant inflation, but banks don’t want to lend as much as they did prior, and the mortgage heavy ones are scrambling to raise capital. Coincidentally it’s those banks that pay higher rates on CDs, but still nothing much over 4%.

Which brings it back to the Fed. You’re basically right in them being a big (if not entire) cause of it and the weak dollar high inflation recipe for recession, because banks aren’t going to pay that much more to borrow your money if they can borrow from Helicopter Ben. They’re probably only borrowing at this point to survive, instead of funding thousands and thousands of Alt-A and subprime mortgages and furthering consumer debt.

I think the true cause of the entire mess is people have been spending more money than they could afford for too long. Now that revolving debt is catching up to itself and banks are making it more costly to borrow to make up for their losses, but the Fed thinks it’s easy money is still the answer.

I don’t know how much that helps, and I’m sure many here can answer your question better than I.

[cr]

I’m no expert, but I think there actually is money floating around which is what gives us rampant inflation, but banks don’t want to lend as much as they did prior, and the mortgage heavy ones are scrambling to raise capital. Coincidentally it’s those banks that pay higher rates on CDs, but still nothing much over 4%.

Which brings it back to the Fed. You’re basically right in them being a big (if not entire) cause of it and the weak dollar high inflation recipe for recession, because banks aren’t going to pay that much more to borrow your money if they can borrow from Helicopter Ben. They’re probably only borrowing at this point to survive, instead of funding thousands and thousands of Alt-A and subprime mortgages and furthering consumer debt.

I think the true cause of the entire mess is people have been spending more money than they could afford for too long. Now that revolving debt is catching up to itself and banks are making it more costly to borrow to make up for their losses, but the Fed thinks it’s easy money is still the answer.

I don’t know how much that helps, and I’m sure many here can answer your question better than I.

[cr]

I’m no expert, but I think there actually is money floating around which is what gives us rampant inflation, but banks don’t want to lend as much as they did prior, and the mortgage heavy ones are scrambling to raise capital. Coincidentally it’s those banks that pay higher rates on CDs, but still nothing much over 4%.

Which brings it back to the Fed. You’re basically right in them being a big (if not entire) cause of it and the weak dollar high inflation recipe for recession, because banks aren’t going to pay that much more to borrow your money if they can borrow from Helicopter Ben. They’re probably only borrowing at this point to survive, instead of funding thousands and thousands of Alt-A and subprime mortgages and furthering consumer debt.

I think the true cause of the entire mess is people have been spending more money than they could afford for too long. Now that revolving debt is catching up to itself and banks are making it more costly to borrow to make up for their losses, but the Fed thinks it’s easy money is still the answer.

I don’t know how much that helps, and I’m sure many here can answer your question better than I.

[cr]

I’m no expert, but I think there actually is money floating around which is what gives us rampant inflation, but banks don’t want to lend as much as they did prior, and the mortgage heavy ones are scrambling to raise capital. Coincidentally it’s those banks that pay higher rates on CDs, but still nothing much over 4%.

Which brings it back to the Fed. You’re basically right in them being a big (if not entire) cause of it and the weak dollar high inflation recipe for recession, because banks aren’t going to pay that much more to borrow your money if they can borrow from Helicopter Ben. They’re probably only borrowing at this point to survive, instead of funding thousands and thousands of Alt-A and subprime mortgages and furthering consumer debt.

I think the true cause of the entire mess is people have been spending more money than they could afford for too long. Now that revolving debt is catching up to itself and banks are making it more costly to borrow to make up for their losses, but the Fed thinks it’s easy money is still the answer.

I don’t know how much that helps, and I’m sure many here can answer your question better than I.

[peterb]

Check out Rich’s latest entry:http://www.pcasd.com/the_impact_of_negative_real_interest_rates

[peterb]

Check out Rich’s latest entry:http://www.pcasd.com/the_impact_of_negative_real_interest_rates

[peterb]

Check out Rich’s latest entry:http://www.pcasd.com/the_impact_of_negative_real_interest_rates

[peterb]

Check out Rich’s latest entry:http://www.pcasd.com/the_impact_of_negative_real_interest_rates

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