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by notahacker
1254 days ago
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Yes, the article expands on simplifications used in economics textbooks as an illustration of how leverage can works. But none of this is "new understanding" of the fractional reserve system operates in practice, least of all to the Bank of England that oversees its operation. > Banks first decide how much to lend depending on the profitable lending opportunities available to them which is determined by time horizons and risk appetite much more than central bank interest rates Hardly "much more", the delta between the rate the bank offers and the central bank rate is the bank's profit, adjusted over a timescale as a net present value calculation and reduced by expected losses. More importantly, it's also the cost of the loan to the person or company deciding on whether borrow or not, so when banks bump their loan rates up in response to a raise in the central bank rate, fewer people wish to borrow and so the bank has fewer profitable opportunities to lend. Time horizons and risk appetite just give banks and companies reason to turn down probably profitable/beneficial loans that are outside their comfort zone. And how does a central bank respond to the banks collectively reducing their risk appetites? It lowers the interest rates.... > Government lending (government as a VC) however has much longer time horizons Ultimately I'd rather have market as VC (government can participate as well) than government as the only VC... |
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1. It's nuts that all central banks globally have one lever to pull - interest rates.
2. yes the central bank sets the interest rate, but the banks choose how much to lend and to whom. I think that if interests rates are at zero, that implies (?) an infinite amount of investment opportunities - ability to grow productive capacity. And yet most loans are real estate or real estate backed (ie collateral). VC is a drop in the ocean of land based lending - and yet our entire economy is based on small amounts of land use for amazing factories and power stations
3. banks aren't doing the business of lending to those capable of productive capacity generation - and they won't cause they want safe near term returns.
VC speculative investment should not be the small corner case - it should be the norm. Industry investment should be not left to crazies willing to risk family house or wealthy with enough to spare.
create money and give it to a million startups