>>> Jim Devine <[EMAIL PROTECTED]> 04/06/00 02:29PM >>>
I wrote: >> In the cycle, interest rates are pro-cyclical, with the
interest rate soaring to the stars in a financial crisis, and then falling
as the demand for loans falls in a recession.<<
CB asks: > Would this mean bankers have a tendency to favor recession ?<
Instead of favoring recession, I'd say that bankers fear inflation
(especially surprise inflation, which hurts them directly, by
redistributing real wealth to the debtors, lowering the effective real
interest rate).
((((((((((((((
CB: Yes, I understand the logic of this. If a debtor pays a loan back with money that
is less in real terms because of intervening inflation, the creditor gets less money
in real terms.
((((((((((((
They try to avoid inflationary surprises by insisting on
zero-inflation policies. In practice, this means that they don't see
recessions as a big problem. However, the high interest rates of Volcker's
early-1980s recessions actually drove some bankers to the brink, which led
to Volcker relenting.
((((((((((((
CB: In general, I think of bankers wanting high interest rates for the obvious reason
that it is the price of money ( which they "sell" in loans). I think they are this
much "in your face" at one level, but I can see that this simple profitmaking would be
contradicted by other factors effecting them in the context of recessions that high
interest rates induce.
(((((((((((
>Would this be a motive for Greenspan, as the bankers' agent, to provoke
recession, all the while increasing bank profits on the way there in the
interest rate hikes themselves ?<
He's not the bankers' agent as much as he's their representative as a
collective. I know that sounds the same, but in the latter case, he
sometimes might go against bankers' stated preferences (as Volcker did for
awhile in 1982).
(((((((((((
CB: Yes, I can see that there the relationship would be contradictory. Sometimes the
interest of the group starts to diverge from individual bankers.
((((((((((((
Interest rate hikes don't improve bank profits. Instead, it's the _spread_
between the rates at which bankers borrow (like the rate on savings
deposits) and the rates at which they lend which improves bank profits. The
spread rose steeply circa 1992, which helped the bankers recover from the
Savings & Loan mess and its spin-offs to other sectors of banking.
((((((((((((((
CB: The Fed sets the rate at which it lends to the ??? What is the relationship
between the Fed rate and the spread ? Also, aren't most of the banks' revenues not
from their borrowing ?
))))))))))))
Recessions don't always help the spread, though a tight-money recession
might do so as deposit rates lag behind loan rates. More importantly, they
help avoid inflation, which bankers hate with a passion.
((((((((((((((
CB: My contradiction on this is, don't monopolies foster inflationary pricing ? Is
this a contradiction between big banks and other big companies ?
CB
