I lend a bit on a system in the UK that's similar to the Prosper thing, although it's tranched and spread across a bunch of creditors. I want to help take as much of this biz away from the banks as I can. Well, firstly, banks don't invest your deposits in safest instruments. Secondly, the money a bank lends doesn't come from the Fed discount window.
Finally for once we agree on something. In addition to the original questions the price of lending has increased related to the return as a result of the failure of conglomerated debt products, which make the risk lower (in theory) and the interest rate reflected that. Now they have failed at least to a degree the risk dispersion they offered (in theory) is no longer there and the price of lending has become higher for the borrower. Also the way they worked enabled the banks to pass on the risk because the debts they took on were sold to other institutions in credit and default derivatives. This meant that the banks themselves were less exposed to the risk the lenders posed. So interest rates were for a long time artificially low for the borrower and the spread between lending and borrowing prices were reduced. The market has changed and the spread has increased.
I am not sure what we agree on and how we managed to arrive at this agreement. As to the rest of what you say, all I can say is "D'OH!". That's leverage accumulation followed by credit crunch/deleveraging for ya, innit? Therefore, I don't really quite see the point.
The OP asked why interest rate spreads were so high. This is the reason, why it has increased. So you agree with me on the last part then?
Which last part? That we have had a period of leverage accumulation followed by a deleveraging? When have I ever disagreed with such a blindingly obvious assertion?
No kidding (mark me surprised that this exists in retail/non-securitized space)... it's tranched... that's quite different from the Prosper type of stuff since tranching actually does help with risk pooling (what do they do with the equity piece?). What's it called?