Show Voice o of business Understanding interest rates By fly Arch Booth president of or orthe the Chamber of 01 Commerce of 01 the United States Stales High Interest rates are frustrating the hopes and dreams of millions of potential bankrupting the housing Industry eating Into the profits of businesses large and small and stifling economic expansion No wonder people are them I Under the circumstances Its It's hard to blame anyone for demanding that the government do something about this problem Some politicians have been quick to toca ca cater ter to this sentiment by proposing laws promising interest rate ceilings or special credit for this group or that group Such solutions look attractive at first glance but they are not solutions at all as you can see for yourself with a little background lr information LETS LET'S START from your point of view Suppose you have havea a few thousand dollars in the bank earning about f five and half percent You may want to keep it there for reasons of security or instant access access But the fact is that with inflation now above 10 percent a year even money earning five-and-a- five h half lf percent is actually shrinking in value at a rate of roughly five percent per year To put that another way you must get interest of at least 10 percent just to stay even more than that tha t to come out ahead If you are worried about the depreciation of your savings savings savings- or if you need to live off the interest as many retired people do then you will seek the highest interest rate you can get consistent with the degree of risk you are willing to run And you will find that many industrial bonds and even some Treasury securities are now paying interest rates of 10 percent or more Interest Rate Hate Ceilings Now suppose that you have decided to lend your money to someone paying 10 percent interest but your state puts a ceiling of eight ight percent on interest that can be charged inthe in inthe inthe the state What would you you do Lend your money to someone outside the state Therefore the states state's Interest ceiling proclaimed to protect borrowers could actually deprive borrowers within the thesta sta state te of or loans Now lets let's go one step further and Imagine that the national government puts an eight percent ceiling on all interest rates What would you do Lend to someone outside the country So now we would also need controls on the export of credit Pass another law AT THIS TillS point in the scenario you cant can't get more than eight percent for your money legally anywhere and it is still depreciating at 10 percent a year What Wha t do you do Well you may take it out of the bank and spend it Why not If you leave it there it will keep losing value And if you buy something that tends to retain its value during severe inflation inflation inflation in in- such as gold or land then you might gain a measure of protection no longer available through the money markets Meanwhile what has been the effect of all these laws to protect the borrower from high rates The result is that your money is no longer available to those who need to borrow it And chances are not much money is available from anyone else either Subsidized Loans OK But suppose that instead of putting a ceiling on interest rates the federal government simply offers loans at favorable rates to hit hard-hit sectors of the economy In this case the government is providing a subsidy to these sectors of the economy equal to the difference between the free market interest rate and the rate the government is charging them IF TilE THE federal government is running a deficit a at t the time which is almost certain these days then it will have to borrow at high rates the money that it is lending to the favored groups a at t low ra rates tes In borrowing to cover past and present deficits the government competes competes' with private borrowers for tor available credit This competition bids Up interest rates Therefore In the very process of helping some groups get credit the government would be worsening credit problems for tor other groups ON TIlE THE other hand If It the federal government balances its budget and stops competing for an larger ever-larger share of ot the available credit the needs of the private sector will be easier to satisfy and Interest rates will come down That's the only realistic way to lower interest rates |