Frozen Interest Rates

Discussion in 'Economics' started by DblArrow, Feb 25, 2008.

  1. Not sure if this is the right place but...

    Heres the scenario - Hillary is elected and she manages to freeze interest rates for 5 yrs as she said she would.

    What happens to the Fed? Do they become irrelevant for a bit?

    What happens to the bond market? Does it also become irrelevant?

    What becomes of the stock market? Do people put in more money because there is no bond market?

    What becomes of all the foreign investment into the bond sales? Does it dry up, looking for better pastures elsewhere?

    What kind of rate do we need? Obviously fairly low to avoid all these people loosing their houses.

    I just can't see any positive scenario's for government intrusion in this area.

    Make 'em pretty, Chris

    P.S. Try to keep this civil - this is not a political debate. It is a discussion of the potential outcomes should she be elected and this become a reality.
  2. I don't know about the other aspects, but if I recall correctly the Fed can also manipulate the money supply by buying/selling Treasuries.
  3. Ok, if the Fed can buy the treasuries, they can only buy them at whatever the rate is frozen at then what? Inflation? Buy them back later at the same price?
  4. Imagine the countries economic situation when nobody will lend at all. That is what will happen if hillbilly gets her wish of freezing rates. What institution would want to risk lending money when the govt can step in and change the rules at their leisure?

    I am skeptical she will do this. As much as I dislike her she is more savvy than that..seems to be just pandering to those desperate to keep their homes.
  5. Good point. If the Fed buying/selling Treasuries cannot affect the interest rate, then the whole reason for the Fed's existence would cease to exist.

    IMO, the idea of fixing rates is ridiculous. Capital would flee for the exits if investors had no certainty as to what bond returns for example would be.