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#15116475
....hopefully with a Masters or higher degree. I have a question and only real economics knowledge and insight can answer it reliably methinks. And I'm not posting it yet because I would like to avoid having it buried by off-topic wrangling and irrelevant arguing.
#15116481
Senter wrote:....hopefully with a Masters or higher degree. I have a question and only real economics knowledge and insight can answer it reliably methinks. And I'm not posting it yet because I would like to avoid having it buried by off-topic wrangling and irrelevant arguing.

I have a degree in economics and 50 years of watching the money ebbing and flowing and a pretty good record of using trends to my advantage.
#15116485
Ok guys, this is a hypothetical scenario question. I'm interested in data, ... in facts and probabilities, ....--not partisan nonsense.

Let's imagine for a moment that the US government decided to nationalize the banking industry. All banking in the US, top to bottom, is now owned and operated by the government, as is all loaning processes.

The decision is made to eliminate all interest being paid on savings and other accounts that previously paid interest to the depositor. Also, all loans are to be made interest-free. All loans to businesses and consumers alike, are "zero-interest" loans. If you want to borrow money to buy a house or a car or a business (or anything else) you fill out the usual application, the application is evaluated, the money is loaned against collateral, and the loan is completed.

What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

It occurs to me that in the context of world-wide banking connections it may not be possible for this zero-interest idea to be done unless it were to be a world-wide change followed by all.

Comments?
#15116487
Senter wrote:Ok guys, this is a hypothetical scenario question. I'm interested in data, ... in facts and probabilities, ....--not partisan nonsense.

Let's imagine for a moment that the US government decided to nationalize the banking industry. All banking in the US, top to bottom, is now owned and operated by the government, as is all loaning processes.

The decision is made to eliminate all interest being paid on savings and other accounts that previously paid interest to the depositor. Also, all loans are to be made interest-free. All loans to businesses and consumers alike, are "zero-interest" loans. If you want to borrow money to buy a house or a car or a business (or anything else) you fill out the usual application, the application is evaluated, the money is loaned against collateral, and the loan is completed.

What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

It occurs to me that in the context of world-wide banking connections it may not be possible for this zero-interest idea to be done unless it were to be a world-wide change followed by all.

Comments?


Your occurrence would be spot on. If that happened in the US, you could always just have offshore accounts.

Another problem is that it would make it harder for the savings market to clear: There could be many people who want a loan but wouldn't be able to get it (particularly riskier applicants, since there would be no risk premium here) if the market equilibrium would end up with a positive interest rate.
#15116488
Senter wrote:Ok guys, this is a hypothetical scenario question. I'm interested in data, ... in facts and probabilities, ....--not partisan nonsense.

Let's imagine for a moment that the US government decided to nationalize the banking industry. All banking in the US, top to bottom, is now owned and operated by the government, as is all loaning processes.

The decision is made to eliminate all interest being paid on savings and other accounts that previously paid interest to the depositor. Also, all loans are to be made interest-free. All loans to businesses and consumers alike, are "zero-interest" loans. If you want to borrow money to buy a house or a car or a business (or anything else) you fill out the usual application, the application is evaluated, the money is loaned against collateral, and the loan is completed.

What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

It occurs to me that in the context of world-wide banking connections it may not be possible for this zero-interest idea to be done unless it were to be a world-wide change followed by all.

Comments?


Why would money be deposited in banks is there is nothing to be gained by doing so? Personally I would prefer to accumulate tangibles such as gold or real estate that would be virtually assured of offering a gain in the long term. OTH an interest free loan would interest me.
#15116496
Senter wrote:Ok guys, this is a hypothetical scenario question. I'm interested in data, ... in facts and probabilities, ....--not partisan nonsense.

Let's imagine for a moment that the US government decided to nationalize the banking industry. All banking in the US, top to bottom, is now owned and operated by the government, as is all loaning processes.

The decision is made to eliminate all interest being paid on savings and other accounts that previously paid interest to the depositor. Also, all loans are to be made interest-free. All loans to businesses and consumers alike, are "zero-interest" loans. If you want to borrow money to buy a house or a car or a business (or anything else) you fill out the usual application, the application is evaluated, the money is loaned against collateral, and the loan is completed.

What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

It occurs to me that in the context of world-wide banking connections it may not be possible for this zero-interest idea to be done unless it were to be a world-wide change followed by all.

Comments?


Not an economist here but an analyst. Mostly from IT.

1) This will create inflation in a sense that to nationalise something in a democratic and capitalist economy you need to compensate the owner. I am afraid to even think how much money the US government will need to borrow or print to do this. This will give money to the owners/shareholders of the banks which will probably flood the financial market or the premium goods market.

2) Loans with 0 interest rates will make the banks some kind of non-profit organisations to stimulate the economy. While it might sound nice, there is already the federal reserve that tries to fullfill this purpose to a degree.

3) Depending on what your criteria for acceptance is, the inflation will either sky rocket or the economy will grind to a halt. If you keep the current cryteria then everyone will just take out loans and then loans to refinance those loans etc. It already happens but with 0 interest rate you will multiply the problem.

4) The most important point probably. If you nationalise all the banks then in case of any economic collapse, those nationalised banks will take the US government/state with it. If something like the 2008 crysis happens then ultimately the government will be responsible for all of the loans and deposits and in case of a bank default then it would mean the default of the US. Doing the same thing as the US did with the 2008 will not work. Liquidity question will be unsolvable.

5) There is a certain moral hazard of being the regulator and the bank itself at the same time. Long term will lead to a systemic failure of some sort either for the economy or for the banking system itself. There is just too many ways this can go wrong.
#15116498
What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?


Under a government policy, Japanese banks are handing out no-interest/no-collateral loans to failing businesses that are dealing the Covid-19 crisis. Commercial banks are basically handing out loans to high-risk borrowers in this scenario. Some of these loans will never be paid back and they are essentially cash handouts from the government. This is a good emergency measure to save the economy but the banking sector cannot make a profit without charging interest on a loan, which is the essence of its existence.
#15116554
wat0n wrote:Your occurrence would be spot on. If that happened in the US, you could always just have offshore accounts.

Another problem is that it would make it harder for the savings market to clear: There could be many people who want a loan but wouldn't be able to get it (particularly riskier applicants, since there would be no risk premium here) if the market equilibrium would end up with a positive interest rate.

Sorry. I'm not understanding the bolded, underlined parts. What would be a "risk premium", etc.?
#15116556
jimjam wrote:Why would money be deposited in banks is there is nothing to be gained by doing so? Personally I would prefer to accumulate tangibles such as gold or real estate that would be virtually assured of offering a gain in the long term. OTH an interest free loan would interest me.

Real estate is not a liquid asset, and gold fluctuates such that a significant risk exists. People, I expect, would deposit money in the bank for safety, stability, liquidity, and convenience. Also, why would gold and real estate have any potential for gain if inflation were kept to near zero? I suppose that even if inflation were zero, market forces reflecting demand would drive real estate prices upward, and similar with gold.

But other than that, what would be the effects of zero interest on savings and loans?
Last edited by Senter on 31 Aug 2020 02:01, edited 1 time in total.
#15116560
ThirdTerm wrote:Under a government policy, Japanese banks are handing out no-interest/no-collateral loans to failing businesses that are dealing the Covid-19 crisis. Commercial banks are basically handing out loans to high-risk borrowers in this scenario. Some of these loans will never be paid back and they are essentially cash handouts from the government. This is a good emergency measure to save the economy but the banking sector cannot make a profit without charging interest on a loan, which is the essence of its existence.

Thanks but that doesn't apply to my scenario.
#15116563
Senter wrote:Sorry. I'm not understanding the bolded, underlined parts. What would be a "risk premium", etc.?


Risk premium: See this.

Market equilibrium: The intersection of supply and demand, in this case it's the interest rate prevailing in a free market. An interest rate is a type of price in (namely, the price of a loan).

Positive interest rate: An interest rate greater than 0%.
#15116653
wat0n wrote:Risk premium: See this.

Market equilibrium: The intersection of supply and demand, in this case it's the interest rate prevailing in a free market. An interest rate is a type of price in (namely, the price of a loan).

Positive interest rate: An interest rate greater than 0%.

As I suspected. Ok. So then let's look at your post that prompted the questions. ....

Your occurrence would be spot on. If that happened in the US, you could always just have offshore accounts.

So you and I agree on this.

Another problem is that it would make it harder for the savings market to clear: There could be many people who want a loan but wouldn't be able to get it (particularly riskier applicants, since there would be no risk premium here) if the market equilibrium would end up with a positive interest rate.

People who want a loan could apply for one as usual. Risky applicanst already have trouble getting loans, so no change there.

Risk premium would be a moot point. The government has money to loan; the government loans it out to qualified borrowers with collateral.

The market wouldn't "end up with a positive interest rate" if it is loaning money at zero interest.
#15116654
Senter wrote:People who want a loan could apply for one as usual. Risky applicanst already have trouble getting loans, so no change there.

Risk premium would be a moot point. The government has money to loan; the government loans it out to qualified borrowers with collateral.

The market wouldn't "end up with a positive interest rate" if it is loaning money at zero interest.


Risky people would have even greater trouble to apply than they currently do.

If the lender was the Government instead, it would take on the risk instead. Any borrower gains (e.g. profits if we are talking about businesses) would be privatized, losses would be socialized.
#15116656
Senter wrote:Ok guys, this is a hypothetical scenario question. I'm interested in data, ... in facts and probabilities, ....--not partisan nonsense.

Let's imagine for a moment that the US government decided to nationalize the banking industry. All banking in the US, top to bottom, is now owned and operated by the government, as is all loaning processes.

The decision is made to eliminate all interest being paid on savings and other accounts that previously paid interest to the depositor. Also, all loans are to be made interest-free. All loans to businesses and consumers alike, are "zero-interest" loans. If you want to borrow money to buy a house or a car or a business (or anything else) you fill out the usual application, the application is evaluated, the money is loaned against collateral, and the loan is completed.

What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

It occurs to me that in the context of world-wide banking connections it may not be possible for this zero-interest idea to be done unless it were to be a world-wide change followed by all.

Comments?

Of course there are economists here, I'm an economist, and your preposition seems too unrealistic to entertain. Why wonder about things which you know will never be. The government should control banking in my opinion. You can look at China for something in between how we have it now in America and what you are suggesting.
#15116663
Senter wrote:Maybe inflation could be kept close to zero?

I think that would be unlikely in the near term, because you are effectively making demand for borrowing perfectly inelastic while at the same time making it easier to service debt. That's one side of the coin. The other side is that you effectively eliminate demand for savings accounts based upon interest income. So the only purpose of a bank account would be as a safety measure or to facilitate transactions. Currently, the US has a fractional reserve system. So if deposits dry up, so does lending.

wat0n wrote:Another problem is that it would make it harder for the savings market to clear: There could be many people who want a loan but wouldn't be able to get it (particularly riskier applicants, since there would be no risk premium here) if the market equilibrium would end up with a positive interest rate.

Possibly, but the scenario is somewhat incomplete. In this scenario, the federal government takes over banks and sets interests rates on loans and on deposits to zero. Does this scenario preclude a black market? Does it preclude the corporate and government bond markets?

Senter wrote:What would be a "risk premium", etc.?

Borrowers that are deemed more likely to default generally must pay a higher interest rate. This is called a "risk premium."

Senter wrote:People, I expect, would deposit money in the bank for safety, stability, liquidity, and convenience.

I think safety and the convenience of transactions would be your best arguments. However, your scenario is more or less limited to depository banking. It doesn't seem to include investment banking--buying and selling securities. So it would seem to me that people would prefer to park money in assets that can provide returns, and banks would not provide that benefit.
#15116664
@blackjack21 I assumed that the interest rate was simply fixed at 0% by law. If the Government intervened by lending as much money as necessary to get to a 0% equilibrium rate, then it would still be taking up all the risk.

Now, some people may want to draw an equivalence between what it did in the subprime crisis bailouts and this proposal, but they aren't the same because the Federal Government actually made a profit with the bailouts :)
#15117801
Senter wrote:Let's imagine for a moment that the US government decided to nationalize the banking industry. All banking in the US, top to bottom, is now owned and operated by the government, as is all loaning processes.

The decision is made to eliminate all interest being paid on savings and other accounts that previously paid interest to the depositor. Also, all loans are to be made interest-free. All loans to businesses and consumers alike, are "zero-interest" loans. If you want to borrow money to buy a house or a car or a business (or anything else) you fill out the usual application, the application is evaluated, the money is loaned against collateral, and the loan is completed.

What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

Well, one question would be where is the money going to come from? Because people normally lend money to banks because they will receive an interest rate.

Now, you could theoretically have the government subsidize the cost of operations, and there would probably still be many people who would put their money in banks out of convenience. Likely it would be less money in banks, because people would be seeking returns on their money in other places.

Then the problem is when you lend out money at 0% interest, everyone wants to borrow, because they can just borrow money, invest it in something else that has a rate of return, and make a profit. Usually interest rates can't go to 0% except in times of extremely low or stagnant economic growth.
Lending out huge amounts of money at 0% interest rates in an economy has a tendency to push up asset prices, like home prices or the stock market.

In fact the Fed (US Federal Reserve Bank) is already sort of doing this in a way, by "expanding the money supply" by lending out newly issued money at extremely low interest rates. So if you want to learn about the effects of 0% interest rates, you may want to look into this area.

It is a very contentious economic and politically controversial policy, which a lot of people barely have any understanding of because it is a little complicated.

The general consensus among most economists is that it is impossible to hold interest rates near 0% for too long, although there are numerous real life situations where that has gone on for many years.
To be honest, it's probably a phenomena not really truly well understood by economists, though there are many arguments and theories.
Economists disagree whether that is good or bad for the economy.

Remember, if investors can borrow money with no interest rates, they will want to use that money to buy some investment asset so they can earn a profit. This is what pushes asset prices up. If an investment asset costs $100 before and earns a guaranteed 5% return, then if I can get a one-year loan with no interest (and assuming the absence of any risk to myself) that will theoretically tend to push the asset price up approaching $105.
When the interest rate is likely to be zero for longer than a year, that will push the asset price up even more, though the math is a little more complicated. (But not too difficult, I can go into that if you really want)
#15117803
Senter wrote:What might be the effects and/or results of such no-interest arrangements and why? Maybe inflation could be kept close to zero?

It occurs to me that in the context of world-wide banking connections it may not be possible for this zero-interest idea to be done unless it were to be a world-wide change followed by all.

Comments?

Usually just the opposite would be the case. Trying to lower interest rates to 0% tends to have an inflationary effect on the currency (if it does anything).

To lower interest rates to 0%, you have to loan out more money, to keep the money available, since everyone is now wanting to borrow since they don't have to pay an interest rate.

Unless you are okay with shortages (where there are many people who cannot borrow money, because there is not enough money available to lend, whereas they could have borrowed money before).
When shortages exist, there has to be some government method of rationing (deciding who gets the loans and how much).
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