An open letter to the Federal Reserve chairman

[SSSnail]

LK, that's fine and all but if I keep getting one more letter bitching about low interest rates, I'll forward it to you (I'm just joking about that last part).

You are right that people do want to borrow with "low" interest rates, and if I recall correctly, it's this "low" interest rates hoopla that kicked start this whole mess in the first place (rewind back to pre-housing bubble crisis). Unfortunately, the average Joe only saw the "low" interest rates and not the gigantic principle which that low interest rate was attached to. Some didn't even see it.

I don't know which bank you work for, but around here, everyday it's "well, we're not making more money because 0 interest rates, so our bonus pool is not that much, and we'll have to cut some stuff". Honestly, I don't know much (feel free to quote), but after hearing the same thing from everyone, from the Chairman on down, I start to believe it.

The people that already bought into the low interest rates and can't pay for it is already screwed, regardless of how low the interest is. And, the people with AAA credits will ALWAYS get loans at low interest. Fundamentally, nothing has changed with that spectrum.

If we don't break through this contraction period, then we'll see stagflation, for a while. Simply put, nobody will be doing anything. And, I believe by raising interest rates right now, just a bit, will bring us out of it. OK, sparky?

 

[LegendKiller]

LK, that's fine and all but if I keep getting one more letter bitching about low interest rates, I'll forward it to you (I'm just joking about that last part).

You are right that people do want to borrow with "low" interest rates, and if I recall correctly, it's this "low" interest rates hoopla that kicked start this whole mess in the first place (rewind back to pre-housing bubble crisis). Unfortunately, the average Joe only saw the "low" interest rates and not the gigantic principle which that low interest rate was attached to. Some didn't even see it.

I don't know which bank you work for, but around here, everyday it's "well, we're not making more money because 0 interest rates, so our bonus pool is not that much, and we'll have to cut some stuff". Honestly, I don't know much (feel free to quote), but after hearing the same thing from everyone, from the Chairman on down, I start to believe it.

The people that already bought into the low interest rates and can't pay for it is already screwed, regardless of how low the interest is. And, the people with AAA credits will ALWAYS get loans at low interest. Fundamentally, nothing has changed with that spectrum.

If we don't break through this contraction period, then we'll see stagflation, for a while. Simply put, nobody will be doing anything. And, I believe by raising interest rates right now, just a bit, will bring us out of it. OK, sparky?

Wonder what your chairman would think if he couldn't find anybody to borrow money at all.

The worst of the subprime loans didn't even touch rates. If you have a NINJA no-doc option-arm loan, rates don't matter.

"Making money" - the banks aren't making money because of risk spread.

 

[Bignate603]

Yes, why do banks "have" to charge interest? Why can't they charge a fee or a certain percentage for a loan?

This would make banks more competitive. But banks do not want to compete do they?

You do realize that your way is worse for the consumer, right? If the bank charged a flat fee they'd just set the fee so they'd make the same amount of money (or more) as they would for the interest rate. It doesn't matter if the amount you're paying them is called "interest" or a "fee". All that matters is the dollar amount that I am paying them.

What's worse for the consumer is that a loan with interest allows you reduce the amount of interest you'll pay over the life of the loan by paying down the loan faster. However, if the cost of the loan is in a flat fee you wouldn't save any money by paying it off early.

 

[SSSnail]

Wonder what your chairman would think if he couldn't find anybody to borrow money at all.

The worst of the subprime loans didn't even touch rates. If you have a NINJA no-doc option-arm loan, rates don't matter.

"Making money" - the banks aren't making money because of risk spread.

Good thing we don't rely on people borrowing to make money.

 

[Bignate603]

Good thing we don't rely on people borrowing to make money.

I think you're confused about how businesses operate. They rely on the ability to borrow money so they can make money. Healthy businesses borrow money all the time. Think about it, say a small company gets a large order. They don't have the money to but all the supplies they need and their suppliers won't give them the supplies until they're paid. The small company borrows money to buy the supplies, makes their product, then sells it to their customer. With the payment from their customer they pay back the loan. They may only have the loan for a few months but without the ability to borrow that money in the short term they wouldn't have been able to meet the order.

 

[SSSnail]

We're a brokerage, and an investment bank.

 

[LegendKiller]

Good thing we don't rely on people borrowing to make money.

Sure you do. There's only one way you can make money in banking, lending. Even in IB you ultimately depend on lending. Without balance sheet most IB's won't make dick from a client. In order to get DCM or derivatives business you need to do some balance sheet lending, whether that's a corp. revolver, term loans, or securitization lending. One way or another, to get decent fee business, you need to lend. That's where most big banks make the most amount of money (except for prop trading..etc).

I've seen it both on the borrower side for the two issuers I've worked for and on the bank side at my current place. It's a simple value chain.

 

[sandorski]

To whom it may concern:

You done fucked up. Quit making the rest of us pay for your Fail.


Sincerely,
A concerned citizen who can't afford to keep paying for your BS while you continue to make Bank

 

[SSSnail]

Sure you do. There's only one way you can make money in banking, lending. Even in IB you ultimately depend on lending. Without balance sheet most IB's won't make dick from a client. In order to get DCM or derivatives business you need to do some balance sheet lending, whether that's a corp. revolver, term loans, or securitization lending. One way or another, to get decent fee business, you need to lend. That's where most big banks make the most amount of money (except for prop trading..etc).

I've seen it both on the borrower side for the two issuers I've worked for and on the bank side at my current place. It's a simple value chain.

We're a brokerage; wealth management, etc... not your traditional bank. Our exposure to the housing bust? Almost zilch. We did not take any bailout dollars. We make money by making money. Simple as that.