How often have you heard about the Fed (or any central bank) to stimulate or cool the economy?  How often has it worked?


This is something that is rather obvious when we understand what things are for.


https://i2-prod.mirror.co.uk/money/article32079198.ece/ALTERNATES/s1200/0_the-number-of-homeowners-in-mortgage-arrears-is-continuing-to-rise-as-living-costs-and-high-interest-rates-take-their.jpg 

<center> [Source](https://www.mirror.co.uk/money/mortgage-arrears-rise-cost-living-32079200) </center>


# Monetary policy Fails Because Interest Rates Aren't  Stimulus


In an era where people were reared on the mythology of [central bank](https://inleo.io/@leoglossary/leoglossary-central-bank) power, people are led to believe stuff that isnt true.  It is also why we find the Fed implementing monetary [policy](https://inleo.io/@leoglossary/leoglossary-policy-insurance) that repeatedly fails.  If they are so smart, how come they have to keep developing more tools to combat things, especially when they tell us they have enough?


The answer comes from the fact this is all propaganda.  None of what they do work because, quite simply, the Fed doesn't do [money](https://inleo.io/@leoglossary/leoglossary-money).  They are not in that [business](https://inleo.io/@leoglossary/leoglossary-business) so to believe they can directly inject anything into the [economy](https://inleo.io/@leoglossary/leoglossary-economy) is a misnomer.


To understand why this is, let's start with the basic structure?


Do you know why there are 12 regional Federal Banks?  What is the purpose of having them?


The answer lies in interest rates.  What was originally designed, before FDR destroyed it, was a system whereby the different regions controlled their interest rates.  The reason for this was to prevent crashes like happen in the early 1900s.


Each regional [bank](https://inleo.io/@leoglossary/leoglossary-bank) was free to raise or lower interest rates as they saw fit.  They did not do this to stimulate the economy.  Instead, it dealt with the thing that [capital](https://inleo.io/@leoglossary/leoglossary-capital) does impact: capital flow. 


If a region found its [banks](https://inleo.io/@leoglossary/leoglossary-bank) did not have enough capital, facing a run on banks, then it could raise interest rates to attract capital from different parts of the country.  Money moves where it receives the best return.  This is what kicked off the [Eurodollar system](https://inleo.io/@leoglossary/leoglossary-eurodollar-system-market) as Midland Bank started offering [USD](https://inleo.io/@leoglossary/leoglossary-usd) [deposits](https://inleo.io/@leoglossary/leoglossary-deposit) better returns than they could get in the US.


Of course, if a region was flush with money, then interest rates could be lowered to drive capital out, knowing it would find a better [home](https://inleo.io/@leoglossary/leoglossary-home).


Keep in mind, this is bank driven decision.


Also notice how none of this deals with the impact upon the economy.


## A Bank's Product


There is also the [market](https://inleo.io/@leoglossary/leoglossary-market) factor to consider.


To explain that, we have to look at what a bank sells?  What is the product a bank puts onto the market? 


The answer is simply money.  Banks are in the business of "selling" money.  That is the product.  Of course, like any business, these institutions want to make as much money as they can.  In other words, they want to get the most out of each sale.


We come to know this as the [interest rate](https://inleo.io/@leoglossary/leoglossary-interest-rate). 


So why don't banks simply lend at higher rates?


This comes down to a [supply and demand](https://inleo.io/@leoglossary/leoglossary-supply-and-demand) equation.  If there is a high demand for money, like any product, the [price](https://inleo.io/@leoglossary/leoglossary-price) is going to be higher.  The reverse is also true.


Hence, when things are going well, banks can charge higher rates with there is a supply of qualified [borrowers](https://inleo.io/@leoglossary/leoglossary-borrower).  Part of the process is accessing [risk](https://inleo.io/@leoglossary/leoglossary-risk), i.e. the likelihood of getting paid back.  When the borrowers who are likely to fall into that category are in short supply, the demand is depressed.


This is why interest rates fall.


It is also the exact opposite of what people are taught.  Banks and [central banks](https://inleo.io/@leoglossary/leoglossary-central-bank) are on opposite sides of the equation.  When the economy requires stimulus, this is the exact time that [commercial banks](https://inleo.io/@leoglossary/leoglossary-commercial-bank) back away.  Here is where the central bank is impotent.  It cannot force the banks to lend.


Most look at interest rates from the borrowers perspective.  The idea is lower interest rates will cause more borrowing.  That is wrong.  It is only the case for dumb money.


Do you know who isn't likely to borrow from a bank in a low interest rate environment?  CFOs.  These are the people who sign off on $25M or $50M [loans](https://inleo.io/@leoglossary/leoglossary-loans) for new plants.  Do you think they are going to borrow when the economy is crappy?  No.


Ergo, we see the list of qualified buyers drying up.  From the banks perspective, there is not the [incentive](https://inleo.io/@leoglossary/leoglossary-incentivize) to lend.  The ones who want money are not of the quality these institutions are seeking.  Therefore, they start to raise their lending standards and cut [credit limits](https://inleo.io/@leoglossary/leoglossary-credit-limit) as things start to head south.


The Fed and every  other central bank has to fight this.  Unfortunately, since they do not do money, they are powerless to inject anything into the economy.  The [money supply](https://inleo.io/@leoglossary/leoglossary-money-supply) is basically in control of the [commercial](https://inleo.io/@leoglossary/leoglossary-commercial-advertising) banks and they are not going to lend when things are getting riskier, especially if rates are dropping meaning they get paid *less* to take on more risk.


This is not how [bankers](https://inleo.io/@leoglossary/leoglossary-banker) operate.  They are the ones who do and know money.


___


<center> [What Is Hive](https://inleo.io/@leoglossary/leoglossary-what-is-hive) </center>


Posted Using [InLeo Alpha](https://inleo.io/@taskmaster4450le/interest-rates-and-failed-monetary-policy)