Pat Gunn (dachte) wrote,
Pat Gunn

Loan Metric

One of the more interesting things that's come out of the negligible-interest loans the Fed has been giving out is the recognition that they amount to gifts. This is clear on the level of theory; those loans have economic value (or they would not be taken) beyond what the market provides. On the level of practicality, the recognition that the loaned money was largely reinvested in (with-interest) government bonds provides the concrete example of how they are effectively a gift (although the example really would stand if they invested the money in some other low-risk stock investment that netted them more than they were losing on the negligible interest on the loan they made.

Let's make it concrete. (see me playing amateur economist)

  • Amount of effective gift = Amount gained through alternate investment - Amount lost in negligible loan rate
  • Amount_of_effective_gift = (loan_size * investment_interest_rate * time) - (loan_size * negligible_loan_rate * time)
  • Amount_of_effective_gift = (loan_size*time) * (investment_interest_rate - negligible_loan_rate)

Unfortunately, both loan_size and time are pretty complicated to calculate; a lot of these loans were very short-term and very large. We'd really want either the time-weighted-sum-of-all-loans to understand the net effect.

All this understood, there is the possibility that we got good value for our money, or at least I am uncomfortable suggesting, based on what I know, that we jump to the seemingly-obvious conclusion that the Federal Reserve did something wrong by providing these effective gifts to large banks. This is because:

  • Banks may be private entities, but they are private in a special way, with a highly regulated topic for society and active participation in national fiscal policy. While it may be true that any of us given zero-interest loans, with a bit of smarts and non-terrible-luck, would make quite a lot of money, the system is set up so that banks act in a certain way and provide certain societal benefits. Note that I will risk saying that by my intuitions banks should not have their current ownership/profit structure (perhaps they should be semi-public? the profits from banks are complicated things, given their role; we do want the business-savvy and distributed judgement from efficiency-and-risk-management-oriented groups, but that is in tension with the role they need to play).
  • Even as private entities, we may have gotten societal value for our money by propping them up. If the cascading effects of a consumer bank failure would do a certain amount of damage to society greater than an equivalent amount of societal good multiplied by the scale factor expected with an average government programme, we ended up ahead by gifting that bank, as wrong as it might seem to do so.
So my hedge amounts to not feeling like I understand the big picture enough to go further than the basic observation that loans below market rates amount to a gift of money that's a fraction of the loan amount determined by how far below market rates the amount is.

And ... whenever I hear about programs to offer zero (or low) interest loans to businesses, I get pretty skeptical. Why not just call them grants and structure them as such? It would feel more honest.

Tags: politics

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