On October 30, 2008 I wrote a blog, What Happens When the Fed Drops the Fed Funds Rate to 0%, hypothesizing that if the U.S. Federal Reserve Board lowered their key benchmark rate to 0%, small business borrowers would feel no real benefit.
Today it was official. The Federal Reserve Board did drop the Fed Funds rate to 0%. Fed Funds is the rate that the Federal Reserve Board charges chartered banks who borrow money from the U.S. Treasury. This new 0% rate means it will cost nothing for banks to borrow money to loan out to small businesses. In my post referenced above, I predicted two things. First, that banks wouldn’t loosen their purse strings and actually loan money, and second, that lenders that are actually lending money are starting to institute interest rate floors. Interest rate floors are the bottom rates that a lender will agree to loan at, regardless of how low the Wall Street Journal Prime rate or LIBOR rate is.
While I find it academically interesting that the Fed has lowered the Fed Funds to 0%, I don’t think it will make any more difference now than it did back on October 30, 2008 when I last wrote about it.
Several jokes come to mind about free money, but since our economy isn’t a laughing matter, I will refrain from telling those jokes.
Yesterday I spent a good deal of the day with the chief lending officer of a major
My friend, the chief lending officer calls herself a “Boomer Banker,” which implies she has been a lending officer for many years since we baby boomers are in or 50s and beyond. My friend has been a lending officer since graduating from college in the late 1970s. She has seen ups and downs. She survived the great banking crisis of 1989-1992. With all of her experience, she says she is dumbfounded that banks have their vaults so tightly closed and locked.
I asked her what it was going to take to get banks to loosen up on credit. Her answer was when the SBA is willing to provide a 100% loan guarantee; SOME banks would lend money, but only to their very strongest customers. My friend visits with bankers from all over the state. She said to me that nearly all bank loan officers she talks to are getting many more rejections from their loan committees than approvals.
Today the Federal Reserve said they would keep their rates as low as possible for as long as possible. I just don’t see commercial bankers, who act like sheep, deciding to take a loan risk until they feel the economic crisis is over. I don’t think that will happen for another 18 – 24 months.