Wednesday

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 15 of 25
…
We will now build a model of financial markets.
The purpose of this model is to help explain how financial markets coordinate the economy's saving and investment.
The model also gives us a tool with which we can analyze government policies that influence saving and investment.
…
For simplicity, we assume
· the economy has only one financial market called the market for loanable funds
· all savers go to this market to deposit their savings
· all borrowers go to this market to borrow money as loans
The term loanable funds refers to
· all income people choose to save and deposit in savings rather than spend for current consumption
· which equals the amount investors choose to borrow to fund new investment projects
…
In this simplified model, the market for loanable funds has one interest rate which is both the savings percentage return and the borrowing percentage cost.
There is not a single interest rate in real life financial markets
-borrowers pay a higher interest rate than savers receive
-the difference going to the intermediary, typically a bank, to cover its costs and for profit
… …
a model of financial markets
kin'yū ichiba no moderu
金融市場のモデル
… …
In the case where the average interest rate paid to small depositors in banks is 5%, what is the average interest rate charged by the bank to borrowers? ChatGPT:
The term for this is “net interest margin” — the difference between what the bank earns on loans and what it pays on deposits.
If a bank pays small depositors an average of 5%, consumer borrowers (credit cards, unsecured personal loans) might pay 10–25% or more, while mortgages or highly qualified business borrowers might pay 6–9%.
Banks need a margin to cover operating costs, risk of default, regulations, and profit.
Historically, if deposits average 5%, a rough simplified estimate for many traditional loans might be around 7–12%, resulting in a 2–7% net interest margin.
The riskier the loan the higher the interest rate.
Credit cards carry high interest rates because they are unsecured (no collateral backing) loans with higher default risk, fraud risk, and administrative costs, so credit card lenders must offset losses from borrowers who fail to repay with high interest rates for all credit card users.
Home mortgage loans carry low interest rates because they are backed by the home itself.

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