MONETARY: Money creation, how are mortgage interest rates set

[Richard Collins <richardc@richardc.co.nz>]

Hello,

This is not so much a question about money reform as it is a question
about how the current system works.

The traditional explanation of how banks lend money is that they take
the money that their customers have deposited, pay interest to the
depositors for the use of their money, which they lend on to other
customers at a higher interest rate. The bank gets to keep the
difference between the interest payed by the borrower and the interest
payed to the depositer, which all sounds nice and fair, the bank did the
hard work of organising it all. This apparently explains why borrowers
are always charged higher interest rates that depositors are paid,
otherwise the bank would be making a loss.

However this explanation is not valid because the depositer's money does
not become unavaliable to the lender when the money is deposited, and
the lent money is in fact created by the bank.

So my question is why are the interest rates changed to borrowers always
higher that the interest rates paid to depositers (as far as I have
seen)? Since the bank is creating the money it is lending, it could
still make money at very low interest rates, though I expect a lot of
inflation would occur in banks were to do so. Wouldn't the competition
between banks make this outcome inevitable?

Thanks,

Richard Collins


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