Glamor Economics

Chapter 102

Chapter 14 Section 3 Greenspan's Magic Wand—Interest Rates

October 1987, 10 was an unforgettable "Black Monday" for Wall Street investors.On this day, the Dow Jones Index plummeted 19% in three hours, and the stock market value shrank by more than 22.6 billion U.S. dollars in six and a half hours.On the same day, 5000 rich people bid farewell to the "Forbes" rich list. At that time, the billionaire Arthur?Kane committed suicide at home.The next morning, Greenspan, who had just been Fed chairman for two months, ordered a cut in the federal funds rate, and long-term market rates followed suit.After months of adjustments, Wall Street investors have gradually gained investment returns and confidence, and the United States has survived the bursting of the economic bubble without any risk.

In the following 18 years, Greenspan changed the tools of U.S. monetary policy, making the federal funds rate an indicator connecting the market and policy. The interest rate tool in his hands is like a "magic wand", guiding The trend of the US economy and the world economy.During the Greenspan era, the U.S. economy maintained a new economic growth for more than ten years, creating a century-old legend.

Why is the interest rate so magical?Because interest rate is the price of capital use, its rise and fall is related to the pockets of residents, enterprises, and governments.At present, countries around the world frequently use interest rate levers to implement macro-control. Interest rate policy has become the main means for the central banks of various countries to regulate the supply and demand of money, and then regulate the economy. The position of interest rate policy in the central bank's monetary policy is becoming more and more important.A reasonable interest rate is of great significance to the economic leverage of social credit and interest rates.

In 2007, the People's Bank of China raised the benchmark interest rates for RMB deposits and loans five times.Among them, the one-year benchmark deposit rate has been raised by 1.35 percentage points, and the one-year benchmark loan rate has been raised by 1.17 percentage points. At the end of 2007, the central bank issued a report that the cumulative effect of interest rate policy gradually emerged: first, the moderate increase in financing costs is conducive to the reasonable regulation of money and credit supply, and restrains excessive investment; Stabilize social inflation expectations.In the case of rising prices, the central bank will increase the level of deposit returns and strive to make the real interest rate positive, which will help protect the interests of depositors.The household savings questionnaire survey shows that the rate of decline in residents' willingness to save has slowed down significantly. Under the current price and interest rate levels, the proportion of residents who think "more savings" is the most cost-effective in the first, second and third quarters was 5.6 and 4 respectively. and 0.9 percentage points, the range is significantly reduced.In the third quarter, the downward trend in the balance of savings deposits was eased to a certain extent.In the process of raising the benchmark interest rate of RMB deposits and loans five times, the People's Bank of China moderately narrowed the deposit and loan spreads of financial institutions. The spreads of the one-year benchmark deposit and loan interest rates were 3.60%, 3.51%, and 3.51% respectively after each interest rate adjustment. , 3.42%, 3.42%, and the interest rate spread gradually narrowed from 3.60% at the beginning of the year to 3.42%, with a cumulative reduction of 0.18 percentage points.

The central bank said that the cumulative effect of interest rate policy has gradually emerged.

Interest rate policy is an important part of monetary policy and one of the main means of monetary policy implementation.According to the needs of monetary policy implementation, the central bank uses interest rate tools in a timely manner to adjust the interest rate level and interest rate structure, thereby affecting the supply and demand of social funds and achieving the established goals of monetary policy.An increase in interest rates will help absorb deposits, curb liquidity, curb overheated investment, control inflation, and stabilize the price level; lower interest rates will help stimulate loan demand, stimulate investment, and stimulate economic growth.When using the economic lever of interest rate, we must consider its pros and cons. When and how much to adjust is an art.

In the early 20s, after the collapse of the Japanese bubble economy, a large number of loans could not be repaid, resulting in a large number of non-performing assets for banking institutions, and the Japanese economy fell into a long-term depression.A large number of small and medium-sized enterprises went bankrupt due to lack of capital turnover, and small and medium-sized banks and financial institutions went bankrupt.In order to stimulate economic recovery, the Japanese government expanded investment in public utilities and issued additional national bonds every year, causing the central government and local governments to be heavily indebted, and their finances were on the verge of collapse. The country could hardly use fiscal leverage to regulate the economy.In order to prevent further deterioration of the situation and stimulate economic demand, the Bank of Japan implemented a zero interest rate policy in February 90. In August 1999, the Japanese economy experienced a short-term recovery, and the Bank of Japan lifted the zero interest rate policy for a time. In 2, the Japanese economy fell into a trough again. In March 2000, the Bank of Japan began to shift the main goal of financial adjustment from adjusting short-term interest rates to "financing volume goals", and at the same time resumed the actual zero interest rate policy again. On July 8, 2001, the Bank of Japan lifted the five-year and four-month zero interest rate policy and raised the short-term interest rate from zero to 2001%.The lifting of zero interest rates also marks the beginning of a significant recovery in the Japanese economy.

When the economy fell into a trough, the implementation of the low interest rate policy reduced the debt burden of enterprises and provided sufficient funds for the market, but its negative impact cannot be ignored.For example, the drop in deposit interest rate caused by the drop in market interest rate caused savers to suffer losses, which directly affected personal consumption.In addition, the easy availability of short-term funds has contributed to the inertia of some financial institutions.Under the low interest rate policy, not to mention the implementation of securitization and the development of derivative financial products by financial institutions, even the profit margins of traditional deposit and loan business are very small, especially the insurance industry has encountered difficulties in operation.Therefore, too low interest rates have deprived financial institutions of the internal motivation to expand their business and develop aggressively.

The central bank adjusts interest rates mainly through interest rate tools. Generally speaking, the interest rate tools used by the central bank mainly include:

1.Adjust the central bank's benchmark interest rate, including: re-lending rate, which refers to the interest rate adopted by the People's Bank of China to issue re-loans to financial institutions; The interest rate adopted; the deposit reserve interest rate refers to the interest rate paid by the People's Bank of China to the statutory deposit reserve deposited by financial institutions; The interest rate paid on the portion of the level.

2.Adjust the statutory deposit and loan interest rates of financial institutions.

3.Formulate the floating range of deposit and loan interest rates of financial institutions.

4.Formulate relevant policies to adjust various interest rate structures and grades, etc.

[links to related words]

Interest rate, also known as interest rate, expresses the ratio of interest amount to principal within a certain period of time, usually expressed as a percentage, and is called annual interest rate when calculated on an annual basis.The calculation formula is: interest rate = interest amount / principal / time × 100%.

The relationship between interest rates and exchange rates Interest rates have an important impact on the exchange rate of the country and the exchange rate of other countries.Interest rate is the product of the relationship between money supply and demand. Increase the amount of money, and the money in the market will increase, and the supply will exceed demand, leading to a decline in interest rates; conversely, reducing the amount of money, the currency in circulation in the market will decrease, and the supply will exceed demand, and the interest rate will increase.Taking China and the United States as examples, if China increases the supply of money and lowers interest rates, assuming that the U.S. interest rate remains unchanged, the RMB will depreciate against the U.S. dollar in the foreign exchange market; depreciation.Therefore, the interest rate policy of a country will not only affect the interests and economic development of its own people, but also affect the economy of other countries through the exchange rate.

(End of this chapter)