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by yCombLinks
938 days ago
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No, they're not. There's a reason that when the federal funds rate started going up last year, mortgage rates(and other borrowing) have went up in lockstep with each fed rate rise. Rather than being forced to lend according to the capital available to them, banks have a giant bucket of cash they can borrow and profit from, but only by lending it out with interest higher than what they borrow at. This pushes everyone to lend money at the same rate, or no one will take their offer. Sure, the sectors and risks are taken into account, but the base price is basically = fed_fund_rate + my_cut + risks |
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Yes, the base interest rate acts a floor on interest rates (individuals and banks are entitled to choose to lend below the Fed funds rate. It just unprofitable to do so. It would be even more and profitable to do, so if the Fed didn't exist). They don't set a ceiling on it, so market participants do choose their own rates, and are entirely free not to get their risk assessments wrong and lend at too low a rate (which Austrians claim to be the primary driver of business cycles). The herd behaviour to lend money at low markups above the base rate is a problem of market dynamics, not a problem of lack of market freedom.
In the absence of central banks, the banking sector still competed to lend at the lowest rate, was not blessed with any more insight into whether a particular industry had too much capital flowing into it or a particular loan was a bad one, business cycles were still a thing and banks went bust more often.