by Temperature_Foreign
Those who have borrowed lots of money to buy assets, such as banks and insurance companies, are in a lot of trouble because the assets they bought have gone down in value, meaning they have lost a lot of money. This means they are going to have a difficult time paying back the money they borrowed.
The government has to come step in and fix this situation to make sure that the banks are able to pay people back. To do this, they have to borrow a lot of money, and they do this by raising money by selling bonds (which are essentially getting loans from people).
In order to raise money by selling bonds, the government has to make bonds an attractive asset. That is, the bonds have to be a good investment, and provide good returns to those who buy the bonds.
This means that the federal reserve must raise the interest rate, because that determines the yield of bonds. Nobody is going to buy a bond at 1%, because the return on investment is so low, in fact, even losing money because inflation is higher than 1%. So the government has to set bonds at something like 7% or even 10%, because then people will buy it, because it will provide a good return even with inflation.
But if bond yields are at 7% or 10%, then that means interest rates are at 7-10% as well.
Higher interest rates hurt banks because interest rates are the cost of borrowing money. And banks’ whole business is the business of borrowing money. It makes it more expensive for them to borrow money to make investments. If banks have to pay 7% to borrow money, then they have to charge 8% to loan money to people. And if people have to pay high rates to borrow money, then less people will borrow. This makes banks lose profit.
For example, if you want to buy a house, and want to get a loan from the bank to pay for the house, it would be nice if the bank offered you a loan at 1%. Then, the loan to buy a house will be cheap, and many people will buy houses. If the bank is charging 8% on a loan, then getting a loan to buy a house will be expensive, and people won’t buy houses (or get bank loans).
So as you can see, when the government has to raise money, they have to sell bonds, and to sell bonds they have to raise the interest rates, and when the federal reserve raises interest rates, banks must pay more to borrow money, and they must charge their customers more for loans, which means less people will loan, which hurts the bank.
And why does the government have to raise money at the moment?
Because they have to help out the banks who have made bad investments and can’t repay the money they borrowed.
Finally, one must note that the banks and insurance companies are in two situations. First, they are holding assets (like holding a stock), but their assets and investments are doing poorly. Secondly, they have borrowed money to buy these assets.
So the government is going to step in and help the banks. They are going to do this by printing lots of money and raising lots of money (by selling bonds).
The big problem is the federal reserve determining an interest rate that:
A – Makes bonds attractive to people as an investment
B – Doesn’t hurt banks too much