How would cutting interest rates help the current crisis?

[dsc]

Think of money being loaned as a product. That would make the interest rate the price the seller gets. Usually if you cut the price of something sellers produce less of the product. So, how does this cut make us have more lent money?

[RoyGBiv]

1. Dollars are not "produced" ...

Not in the sense you mean it.

In very simplified theory a lower interest rate makes it easier for those seeking loans to purchase goods and services. It "loosens" the money supply without the need for extra "production" of dollars.

[dsc]

4. I realize that but you can do other things with the money

so why would cutting the price of loans produce more loans (as opposed to say investments).

[RoyGBiv]

5. Because ...

One of the primary sources of income for banks are loans.

This is a very complex subject made more complex by the thinned line between a bank and an investment bank. They work differently ... or are supposed to.

[Oregone]

7. I answered this below...

If the government is loaning at a low rate to banks then:

1. the banks stand to profit more from higher margins, and will be more encouraged to loan

or

2. the banks can lower their offered rates to public/businesses to encourage them to borrow without losing money.

[Reform]

2. maybe I'm confused but

i thought interest rate cuts = Printing money
Printing more money devalues the dollar
So I'm not sure how it improves the crisis
Am i wrong here?

[RoyGBiv]

3. You're basically correct ...

Its effect on the current crisis is complex and not something anyone can actually predict with precision.

One of the basic problems right now is we have economic issues that are playing off each other but which are traditionally approached in different ways. The credit crisis is overwhelming at the moment, and actually increasing interest rates would worsen that.

We have found the "sweet" spot between the rock and the hard place. And it sucks.

[Oregone]

6. This is the rate at which the government loans to banks.

Who then in turn, can turn around and lend it at 6% to people and collect the massive margins.

So, the lower the rate then 1) the more interest revenue a bank can generate off of a loan at the current market rate (which encourages banks to lend) and 2) they can further lower their lending rates (encouraging the public to borrow).

The real crisis is that banks are not willing to loan at this point in time. Cutting interest rates encourages banks to borrow from the government, as well as increases the amount of money in circulation (leading ultimately to inflation if let run rampant). The interest rate does not, whatsoever, determine how much money is "produced" as you put it. Rather, it can determine how much demand there is for borrowing. The lower it is correlates with more demand and more growth/inflation. It is so low at this point it is almost costing the government more to loan than it gets back, but that is the price they are willing to pay to encourage economic activity.

[dsc]

8. I can see that

though it sure sounds like the deficit will be ballooning some more.