Hi,
I'm doing a seminar on how the FED and FDIC act to cartelize the banking system through the federal funds rate, discount window, setting the reserve requirement, and insuring deposits.
Here's a link to my presentation given today:
http://www.sendspace.com/file/jx3y5r
I was arguing that the cartelization harms consumers/depositors by creating inflation, but my professor dislikes this approach so I need to show that the lack of competition brought upon by the government actually harms consumers through higher interest rates, or higher spreads (between loans and deposits) or by setting a "cartel price" of interest rates.
Can someone think of a way that setting the federal funds rate affects interest offered on deposits for example? I'm not talking about the absolute rate but rather on the banks all setting the same deposit rate because of the federal funds rate.
That's just an example of what's i'm having trouble with, other connections between interest rates are also welcomed.
Thanks in advance,
Gilad
Your professor is conversant in price control theory, right? Try make this seem to be a specific instance of it (which it is.) The interest rate will skyrocket as savings dry up, whereas the price controlled "market rate" will be forced low to continuously expand credit. Besides obviously violating consumer preferences by violating the market, it is inflationary (eroding purchasing power) and dries up the resources for real wealth creation. If he doesn't agree with this then he does not understand price controls.
Freedom of markets is positively correlated with the degree of evolution in any society...
actually part of the problem we are now facing is that government incentives kept 30 year loan interest rates artificially low by pumping up demand with poorly planned housing initiatives.
Thanks for replying!
My professor (although dealing with anti-trust extensively) knows little about economics. Today while giving my presentation, i had to explain fractional reserve banking to him... (the most basic stuff... nothing fancy)
What i'm looking for, to satisfy him, is the link between the federal funds rate to anything DIRECTLY influencing consumers. something like interest on deposits, mortgages, etc.
I suggested I could argue the case that inflation hurt consumers but apparently that isn't enough. how can i link the FED setting the federal funds rate to the banks offering the same interest for loans/deposits?
Again, thanks for replying!!!
Regards