Economics: Forcing Interest Rates Low

[Phrak]

ECONOMICS

"Any legislation to force intestest rates lower will probable have to wait for a new president."

This is a quote from the talking heads at ABC news (ABC World News).

What would be the effects of national legislation forcing mortgage lenders, by law, to make loans at a lower rate?

 

[CRGreathouse]

What would be the effects of national legislation forcing mortgage lenders, by law, to make loans at a lower rate?

Decreased willingness to lend, increase of transactional costs (to effectively raise the rates), further pressure to avoid lending to high-risk customers. If these options are not available (perhaps the legislation forbids them) then further collapse of the banking industry would be the likeliest outcome, though probably not for at least 6 months. This would continue until the oligopoly power of the remaining lenders increases to the point that the rent-seeking behavior (in this case, lending to low-risk customers at rates above the natural/competitive rate but at or below the legislated maximum and also at or below the monopoly price) offsets the profit loss from the forced loans.

The cost of forced loans to the companies would be a fixed price, a net transfer, which would not greatly alter their behavior (except indirectly, though failed companies) -- a good thing. It would, however, alter the behavior of high-risk customers, who would consume (relative to the natural/market conditions) 'too much' risk and consequently default more often than in that case.

 

[Phrak]

...in this case, lending to low-risk customers at rates above the natural/competitive rate but at or below the legislated maximum and also at or below the monopoly price

I hadn't thought of that... Well done.

So the lower risk parties obtaining loans will pick up the tab for higher risk parties. This would tend to attract offshore lending institutions to seek-out low risk customers. Given the motivation, there should be a means to circumvent any preexisting federal legislation.

This would motivate lenders to set-up offshore operations themselves, and at the same time seek legislation to curtail foreign lenders (new competitors, in any case), I would think.