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)