Dirk Ehnts — Why I am a horizontalist

Once upon a time, there was a discussion about interest rates set by banks. Do banks:

1. increase interest rates when they face a specially large demand or
2. set interest rates and then ignore the demand for loans

The first position is called the verticalist position, the second the horizontalist.…

econoblog 101
Why I am a horizontalist
Dirk Ehnts | Lecturer at Bard College Berlin

Brian Romanchuk — Banks Borrowing Short And Lending Long

Now that there appears to be a chance that the Fed could possibly hike rates by at least a little bit within a few months (maybe), there is increasing interest on what the effects would be on the economy. One area of contention is the effect on the banking system. In my view, you will need a microscope to find the direct effects on banking system profitability (I ignore any macroeconomic feedback from rate hikes, which are an entirely more awkward question). That is not to say that enterprising bank CEO's would not seize upon blaming the Fed for their own failures of leadership. It appears that the belief that the level of interest rates affect bank profitability are based upon inapplicable historical analogies, as well as blurring the distinction between liquidity risk and interest rate risk. 

The academic J.W. Mason did an interesting piece of analysis in "Interest Rates and Bank Spreads." He was responding to an internet debate, which I am not directly addressing. In Mason's article, he crunches the published average bank interest rate charges (both lending and borrowing), and shows that they are consistent with a relatively steady spread regardless of the level of interest rates. Luckily, I do not have to download the data and analyse it myself; he did the work for me. Instead, I want to explain why we should expect this spread behaviour to occur, and an interested reader can then consult his analysis to see that the theory matches observed behaviour.

How banking works.

Bond Economics
Banks Borrowing Short And Lending Long
Brian Romanchuk

Brian Romanchuk — U.S. Economy: This Was Not Supposed To Happen

Brian covers a lot of ground in this analysis, which includes a journey through the natural rate doctrine and its use by the Fed.

Bond Economics
U.S. Economy: This Was Not Supposed To Happen
Brian Romanchuk

Tanweer Akram — Money Matters, Ultra-Low Long-Term Interest Rates and Feeble Growth

MMT is catching on more widely. Check out the references at the end of the article.

Read it at ING Market Perspectives | Market Insight
Money Matters, Ultra-Low Long-Term Interest Rates and Feeble Growth
by Tanweer Akram, PhD | Senior Economist, Global Rates
(h/t Scott Fullwiler via Twitter)