Why does the govt control interest rates?

Without a well regulated financial system, your fair share would have been the total loss of everything you had in savings as the "Panic of 2008" would have lead to the collapse of nearly all banks, brokers, stocks, and retirement accounts. All you have to do is look back at the boom and bust cycles in the years before the Federal Reserve was established to understand what a remarkable job it has done since then.

-john-

The government doesn't have much power over long term interest rates.

Inflation encourages people to seek a higher return even if the risk is higher.

Bond holders are the major beneficiary of these bailouts.

I wouldn't consider that to be good financial advice.

Buy gold, stock, or real estate if you don't like the return from bonds or CDs.

-- Ron

I seriously doubt that. Savers would not have lent much money to clowns on wall street selling securitized junk and leveraging their bets in the first place. The scam would have been shut down long before it ever started growing. It is the low interest rate set by the federal reserve which encouraged/encourages this irresponsible gambling to the detriment of people who have worked hard and saved their money.

In a real free market system, no person would ever want to deal with a bank leveraged more than 25% let alone 26X its capital base as is the case if the govt did not gurantee their money via FDIC. This gurantee comes at the expense of savers once again who are punished for the wreckless behaviour of others.

In a real free market system, i'd be offered 50% interest for my capital being lent to some company like Citibank and made to assume the risk of losing it all (no FDIC). Some savers would take the deal, others would decide to put only a small amount in. The govt would have no role in just handing out my money like free candy.

So in the end, holding fiat money is useless. Its an invitation for others to steal what is mine and give it to the irresponsible whenever some guy at some govt organization decides to do so.

Indeed, a historical comparison reveals that government rates (such as Fed Funds, etc.) tend to FOLLOW market rates, rather than lead them. It's more of a smoke 'n mirrors game ... (but this guy can say it way better than I can):

There's nothing inherently wrong with inflation (so long as the rate of inflation remains at a moderate level and is reasonably predictable). Runaway hyperinflation (1920's Germany, modern-day Zimbabwe) is another story, but hopefully that's not our lot -- the current market (as measured by the TIPS spread) doesn't envision such a scenario over the next 30 years or so.

Given the fact that foreign investors (China, Japan, Europe and elsewhere) have been a major financing source for our level of consumption, I can't help but think that one of the key rationales behind these bailouts is to bribe those investors into sticking with our game: if you keep investing with us, we'll back our promises in the future as we are backing them up today. That's a guarantee that's hard to match in an atmosphere of uncertainty. Hence the current weird spike in the dollar's strength.

You are speculating about what would have happened if there had been less regulation. Another way to look at it is to ask what would have happened if there had been more regulation. Fortunately, it is easier to get a more definitive answer to that question simply by looking at Canada. The Canadian banks are still in excellent shape, and there has been no financial crisis except for what has spilled over from the USA. The reason pretty clearly is that the Canadian federal government regulates banks far more closely than is done in the USA. Subprime mortgages have been few and far between.

If it makes you feel any better, they don't have that power. What the set are overnight lending rates. Government securities are sold at auction. It really is the market that determines the rates.

Again, unless you are borrowing money at the overnight lending rate then your rates are being determined by the markets.

Nothing is "for free". The bailout is primarily in the form of loans. Will we be repaid, that's another issue.

If you are not happy with the yield on government securities you can always go into the corporate markets where investment grade and high yield bonds will pay you more. Even muni's are yielding more these days.

The current rate for I Savings Bonds is 5.64%. Stop complaining, start doing a little research.

I think if we had had less regulation the mortgage crisis would not have happened. Federal regulation required the lending of a large percentage of mortgages to those with low incomes who were going to have trouble qualifying for traditional mortgages with traditional down payments. These regulations were enacted during both the Clinton and Bush administrations.

Elizabeth Richardson

You have got to be joking. Poor people are to blame for the mortgage crisis? You mean it's the poor people who sell and re-sell packaged mortgages at 50 to 1 leveraged ratios?

No, I am not saying the poor are the cause of this. I am saying that a large part of this is due to the requirement that more than 50% of mortgages be made to people who couldn't afford them. Do you honestly think banks would have been making these loans without such a regulation? Inflation happens because there is too much money chasing too few goods. This regulation requiring so much money be loaned to those who could ill afford it created huge inflation in home prices. And, you might want to take a look at the regulations, too, when you talk about 30:1 leverages, which were approved by government regulation for a few select lenders. Was this not government regulation - or are you calling this deregulation? I have said before there are plenty of directions to point the finger, but let's be clear: government regulation was part of it.

Elizabeth Richardson

======================================= MODERATOR'S COMMENT: Posters to this thread should relate comments to general financial planning.

You mis-characterize the federal regulations. They did not cause this crisis. Predatory lending did. Fully 60% of all sub-prime mortgages were given to people who qualified for regular mortgages but were not told. No regulation ever told the banks to give loans to unqualified customers.

By the way, mortgages given under the CRA have some of the lowest default rates. Thumper

======================================= MODERATOR'S COMMENT: Posters to this thread should relate comments to general financial planning.

On 2009-03-22 16:30:44 -0700, "Elizabeth Richardson" said

Back to Canada again, if what you say is true, then Canadian banks are in good shape, despite strong government regulations, simply because they were not forced to make loans to low income groups. And in the USA, since much stronger regulations are now being put in place by the new administration as a result of the crisis, all we can be expect in the future is still more crisis and decline in the economy. That is a dismal prospect for small investors trying to decide how to invest their money!

Don, not to steal your thunder altogether (since I think you are mostly on the mark here), but I checked the five largest Canadian banks traded on the NYSE (RY, TD, BNS, BMO, CM). They're all still down around 40% from their 52-week highs. Granted this is probably much better than U.S. banks, and no small part of the explanation does seem to lie with Canadian government regulation. But I would still be curious to know more about why Canadian stocks are some 40% down before declaring them in "excellent shape."

Also, re the housing bubble bursting, I thought previously evidence was presented here that, of the two candidates, the greater impetus for the meltdown came from speculators (= former house flippers and multiple house owners), not low income, single-home purchasing borrowers.

Elle

I believe that Canadian bank stocks are down as a part of the overall decline in stock prices in all sectors, not because those banks are on the verge of collapse or are thought to be unusualy risky investments. And to some extent it may reflect the distrust of banks spilling over from the concerns in the USA, even though Canadian banks are in good shape financially. As to your second paragraph, I have no opinion about the cause of the housing bubble bursting, although I would doubt that speculators alone could case it without a climate of lax regulation and easy mortgages.

That's bullshit. They are in good shape because their laws prevented predatory lending.

No bank in the USA was forced to make loans to people they knew couldn't pay. Thumper

Your opinion is noted Don but mine is somewhat different. The stats for the above banks as given by yahoo for one do not make a compelling case for Canadian banks being in excellent shape. My point is that no one should put money down on an investment in Canadian banks without more research. I am not as sure as you that their bank stock prices are irrationally low as opposed to being low because of each bank's financial fundamental statistics.

Somehow I thought I was saying that too! Canadian banks are in good shape because they have been closely regulated, and US banks are in bad shape because they were not regulated enough, not because they were overregulated, as another poster implied. And, indeed, predatory lending has been more important than any coercion to make loans to low income groups.

How would you define predatory lending? And, to keep this on personal finance issues, how does a borrow recognize it and refrain from being the other half of the contract?

Elizabeth Richardson

I don't like that term ("predatory lending") because it insinuates that lenders are evil. My view is that one person's "predatory lending" is another person's "responding to consumer demand".

-HW "Skip" Weldon Columbia, SC

But you could say the same about loan sharks. People cannot make loans at 10% a week if there are not consumers needing money and wanting them. The same for "payday" lenders. Certainly not all lenders are evil, probably not even most, but some are. I would say there is a blurred distinction between high interest rates and usury, and it is not always a cut and dried matter in which category a given lender belongs.