The Interest Rate Conundrum

Everyone in the United States (I exaggerate) refinance their homes when interest rates hit 2.25% and of course, this was a new 30-year loan that made payments lower, but longer.  And they probably refi-ed so they could take more money out and enjoy life.  Now interest rates have jumped to 6 %—and for some, up to 8%. Many people now find it hard to afford a home.

The banks loaned money at 2.25% long term to homeowners for 30 years.  Now, the banks’ depositors want higher interest rates. Depositors can withdraw their short-term savings and deposit them elsewhere at a higher rate.  The problem is the banks cannot cover the spread.  Essentially, they are bankrupt. They loaned hard money at 2.25% long term, for 30 years, and cannot afford to pay the depositors current rates.  You cannot make a promise long term if the short term makes it impossible.

The government lowered the interest rates artificially to lower the payments on the national debt.  This robbed retired savers of their retirement interest income. Everyone refinanced, and the new problem, inflation crept in.  Raising interest rates only makes it worse. And that is where we are at.

This happened once before with the Savings and Loan collapse of the 1990’s. Of course, no one remembers back that far. Do they? That problem was a minnow, this one is a whale.