tag:blogger.com,1999:blog-8702840202604739302.post5344370101511123558..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Bank of Canada Slashes Bank Rate to 1.5%David Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8702840202604739302.post-528976254294209792009-03-06T00:02:00.000-08:002009-03-06T00:02:00.000-08:00I think these central bank (CB) interest rate cuts...I think these central bank (CB) interest rate cuts are basically hype and do little to solve fundamental problems. But I am probably missing the point - I am (mostly) an applied microeconomist after all. Please someone illuminate me.<BR/><BR/>Here's a simple example. Suppose I am a lender and I face a borrower who, for some reason, has a 10% risk of default (or I think he has). Assume I collect 0 if default happens. Suppose also my opportunity cost of funds is equal to the CB rate, e.g. initially at 4%. Then, to break even (assuming no additional problems exist in the credit market) I would lend each $1 at a gross interest rate of r=1.04/0.9 i.e. at about 15.6%. What if the CB cuts rates to 0%? My lending rate must be then 1/0.9 i.e. 11.1%. The real reason for these high rates is the 10% default rate which 'inflates' the lending rates, not the 'safe asset' CB rate. Of course, things get much more dramatic (and the effects of the CB cuts more negligible) if you jack up the default probability to 20 or 50%.Unknownhttps://www.blogger.com/profile/06040939057588237371noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2182071107992653782009-01-10T09:45:00.000-08:002009-01-10T09:45:00.000-08:00So what will it take to stimulate growth hmmm? Or ...So what will it take to stimulate growth hmmm? Or are we destined for years or decade(s) of tumult and decline?<BR/><BR/>"and there is nothing that the Bank of Canada can do to influence the lending practices of the private sector." ..and I think I disagree with this statement. Not sure why but the BoC doesn't seem to like settling for 'nothing'.<BR/><BR/>Would also like to know what you think of the role of gov't, particularly recent bailout announcements.<BR/><BR/>Perhaps this blog would be much more stimulating if the editorial entries were more savy and inspired and a little less tutorial?E Cogniachttps://www.blogger.com/profile/03370725204579323214noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-86774143948361101762009-01-10T09:01:00.000-08:002009-01-10T09:01:00.000-08:00I'm surprised this is your only comment on current...I'm surprised this is your only comment on current events. Would have thought a macro-maniac of your calibre would have much more to excite your interests and stimulate your expression in such volitile times. Is the rain watering down your malt? Yeech, you aren't on to blended crap or worse- on the wagon!?E Cogniachttps://www.blogger.com/profile/03370725204579323214noreply@blogger.com