Higher loan rates inevitable

[robertbrazma]

G'day

Almost 50% of those applying for loans have been rejected - up from a third just 6 months ago. In addition, lenders have tripled their rates for high risk customers. Several loan providers have indicated that they are to pull out of the unsecured loan markets as the scarcity of credit continues following the summer’s sub-prime [...]


Thnx

[Scanner]

Only being an amateur economist, I have often wondered if the solution to this "crisis" we are in isn't to lower interest rates, but rather to raise them to attract bond investors.

Let's face it - ala Greenspan and Bernacke, for the last 30+ years, we have put artificial pressure on the bond market to the point it's almost a joke. We have wanted continued stock market rallies.

It wasn't always so in the American economy. I remember reading at one point that 1/3rd of the time in 20th century, the bond market outperformed the stock market.

If Bernacke raised interest rates and all of the sudden you could buy bonds for 8%, to me, there would be money to lend. Yes, at a high interest rate. . .but the liquidity problem would be solved.

[Broken Arrow]

I've lost the link, but I remember about how Greenspan has commented (after stepping down from the Fed Board) that what the economy really needed was a temporary jolt of super high interest rate to get it off the collision course with recession.

Yes, bond investors would have a field day, but the average American is running on debt, not investments, and the impact could be catastrophic. I think Greenspan argued that that is exactly the problem, and needed to get Americans away from living off of debt. The temporary pain would be worth the long term overall health.

Of course, such a move would never be politically possible so... our slide continues. My personal take is that Bernanke isn't so much as averting recession as he is just trying to soften the damage upon impact. With that, I think more rate cuts are in our future, at least for the short term.

[disneysteve]

Originally Posted by Scanner

If Bernacke raised interest rates and all of the sudden you could buy bonds for 8%, to me, there would be money to lend. Yes, at a high interest rate. . .but the liquidity problem would be solved.

The problem, I think, is that would lead us back to 1980 or so when savings rates were sky high but so was inflation. Higher rates benefit savers, but hurt businesses as it raises the cost of doing business and makes it harder for businesses to expand or for new businesses to start up because they can't borrow needed funds. If folks are stashing their money in 8% bonds, they aren't spending as much which also hurts businesses, so they have to raise their prices. It becomes a vicious cycle.

[Scanner]

Well, I am not talking getting the interest rates up to 1980 status. I can remember a neighbor having a CD that paid 16%.

Yes, that's right - 16%.

But the times were different because inflation was running 20% or higher and people actually wondered if that was the right move - to buy a CD at 16%.

I don't think having CD's paying 8-10% would be that much of a crimp on the economy (but what do I know?). Banks could turn around and loan that new liquidity at 15%, maybe less with advent of internet banking.

[robertbrazma]

G'day friends,

Thnx for sharing the good information.
This is very useful information to me.

Thnx

[neguy11]

It's true, I work at a student loan company and we just tightened our qualifications. For our private loan consolidations, the borrower has to have a 40% or less DTI ratio. Nearly impossible for most students and even many parents willing to cosign. It's frustarating denying so many applicants, but these private student loans are such a high risk that I don't blame upper management for doing this.