The cure for systemic fragility is not low interest rates forever–it’s a market that transparently prices credit and risk for lenders and borrowers, qualified and marginal alike.
One of the most unquestioned narratives out there is that the Federal Reserve raising interest rates from 0% to .25% (or .50%) will crush everything and everybody. But does this make sense? Let’s start by putting ourselves in the shoes of actual lenders and borrowers.
From the point of view of the lender, higher rates are positive, as they enable higher margins.
Perversely, the Fed’s zero-interest rate policy (ZIRP) was negative for lenders, as the yields on issuing loans declined. This made legitimate lenders reluctant to issue loans, especially to those with less-than-sterling credit. Why take a chance for pitiful yields?
From the perspective of borrowers, another half-percent of interest is not a dealer breaker for most borrowers–what matters more than the interest rate is the availability of reasonably priced credit. What matters more than the advertised rate on a mortgage is the availability of mortgage money in the real world.
This post was published at Charles Hugh Smith on MONDAY, FEBRUARY 02, 2015.
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