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The Interest rate

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Mr. Wynand

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If the interest rate is the price of credit, then is it safe to say that lowering the interest rate below its market level creates a shortage in credit for the same reason it does with any other good when its price is artificially lowered? However, would raising it above its market level eventually cause a surplus?

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If the interest rate is the price of credit, then is it safe to say that lowering the interest rate below its market level creates a shortage in credit for the same reason it does with any other good when its price is artificially lowered? However, would raising it above its market level eventually cause a surplus?

Government messing around with the money supply and interest rate is a big part of the reason we are in the mess we are in at the moment. If you want to understand why, this is a pretty good place to start - http://mises.org/daily/2810

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If the interest rate is the price of credit, then is it safe to say that lowering the interest rate below its market level creates a shortage in credit for the same reason it does with any other good when its price is artificially lowered? However, would raising it above its market level eventually cause a surplus?
If the government were to say "people may not charge more than x% for mortgages of type Y" (where x% is lower that the free-volition rate) there will be more people who want such mortgages than people who wish to provide them. Similarly, if the government insists that x% should be higher that the free-volition rate, then there'll be more people waning to lend at that rate than borrowers who want to borrow.

However, the government does more than set rates. It is actively involved in the business of credit. Government do not even set interest rates very much any more. They come in as subsidizers of credit and -- most importantly -- as suppliers of credit. For instance, since the downturn, the government has financed the majority of mortgages in the country, coming in with a whole lot of supply to replace the suppliers who have shrunk back or disappeared. So, rather than lower rates by mandate, the more typical route (these days) is increasing the supply of credit, which in turn has the effect of lowering rates (at least ion the short/medium term).

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However, the government does more than set rates. It is actively involved in the business of credit. Government do not even set interest rates very much any more.

Side question: I get almost all my "newer" info, like this, on money and the economy via Objectivists. But where do Objectivists get their info? That is, how may I get this info myself?
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Lowering the cost of a good does not create a general, sustained shortage of that good. First, you have to assume that there is pent-up demand which is satisfied by price reduction -- not an unreasonable assumption, but it's not obviously true that there is demand. Second, one supplier lowering prices can exhaust his supply of the good, at which point he has nothing to offer. Other suppliers will temporarily loose some share of the market, but things will be back to normal soon. A shortage comes about only when demand is higher than supply (and not just for an hour or two until a shipment is unboxed), so it would depends on what brings about increased demand or decreased supply. In the real world, a shortage is short-lived, because producers set about making more of that which is in demand. In the surreal world where there is no causal relationship between wealth and currency, credit is essentially an uncaused bit of magic, so it's unpredictable how long a shortage of credit will last.

I don't think it's possible to "articificially" lower a price: raising and lowering a price is a natural economic fact. The government can artificially and forcibly regulate the price of any commodity, but I think we should only speak of "lowering the price" as something that the supplier does. Of course, when the government does forcibly regulate the supply of commodities, there is an abundance of shortages. Perhaps that's what you're referring to.

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