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Old 10-29-2018, 06:47 AM
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Sage Rat is offline
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Originally Posted by septimus View Post
Right-wingers sometimes accuse us moderates of wanting "Soviet-style central planning." I predict that this thread will refute that: I predict you will get Zero Dopers endorsing your plan.

Banks set their interest rates based on their assessment of the chance the loan will be repaid, NOT per the advice or mandate of a government regulator. IIUC, the Federal Reserve sets exactly one interest rate directly and even it is more of a suggestion than a mandate: They set a target for the rate federally-chartered banks charge each other for overnight (not even 24-hour) loans made electronically on FRB computers. (They also set the interest rate paid on their deposits.)
I am aware.

But math is math. The optimum value you (as a bank) should charge is based on the numbers in the environment around you for defaulting rates, interest rates at federally-chartered banks, how optimistic the market is, labor rates, etc. While fuzzy, there is in theory an optimum that can be gleaned through the mist, using some rough math, and when the numbers in the environment change, your formulas will spit out a different number that you should be applying in your business. While the FRB interest rate is not a mandate, it does affect the economy through a trickle-down effect via the simple math of the situation. Everyone wants to profit, and so they're going to change their numbers to maximize profit. It's the law of running a successful business that has people who can do math running the books.

If you split the FRB interest rate and can target it, then we would expect there to be some amount of actual effect. There might be no law mandating that banks adjust their interest rates along with the FRB, but there aren't today either.