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Comment by skybrian | Hacker News Reader

Seems like the second idea (interest rates should be higher) contradicts the first (it should be easier for banks to make loans to small business). Higher interest rates would tend to discourage loans.

Edit: I guess the idea is to increase supply and reduce demand?

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It would discourage people from taking loans, but why would it discourage banks from making them? In fact, higher interest rates would mean that the cost of liquid capital, a bank's main equipment for making money, were suddenly more productive, right?

Wouldn't it be pointless to make something that nobody buy?

Clearly high interest rates in the 80s didn't prevent banks from making loans. Lets talk about the inverse of of what you're suggesting - perhaps the lack of ROI on loans is preventing banks from doing what they're supposed to be doing - lending to small businesses.

How does a low interest rate prevent a bank from making a loan to a small business?

A low interest rate is not a federally mandated cap on interest it is an increase in supply which drives down the cost. Which should increase ROI.

What you say may be true for almost all the products, unless when the product is 'money' itself. Something worth considering.

Easy access to low-cost loans creates the illusion of affordability and exacerbates over-consumption (over-consumption: a general malady afflicting most humans)

But the article is arguing the opposite of over-consumption, that there are not enough loans to small business.

Because the way the fed increases interest rates is by selling a bunch of bonds. Which incentivizes people to moves money from the private economy to the Fed, and which leaves less money available to lend to small businesses.

>In fact, higher interest rates would mean that the cost of liquid capital, a bank's main equipment for making money, were suddenly more productive, right?

Banks basically just borrow money at x then lend it out at x+y. With y being expenses, defaults, and profits. Now if x grows that doesn't grow y, if anything it shrinks it because there are less individuals looking for a loan at the increases price.

Basically if banks were toy makers, the interest rate would.be the price of plastic. Sure if the price of plastic went up toy makers would charge more for toys. But they wouldn't be making more money, if anything they'd me making less.

It doesn't discourage loans. Fast growing small companies are one of the only constituents who can justify higher interest rates. Now giant companies and individuals going on vacation get cheap credit but small businesses mostly can't get any.

This seems odd, because it seems like if a business is willing to pay a bit more when interest rates are low, it would mean more profit for the bank willing to take the other side of the deal.

Yes, the spread would be better, but banks don't do it unless you have several years of high cash flow and positive on-paper income. Even if the owner is deliberately trying to offload the income into another corporation, they can't figure it out and say the income statement looks bad. Banks don't even understand small businesses at this point.

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