Economics question

[pokerfan]

You will have to dumb it down because I've only had two econ courses, albeit one was a 400 level...

How does lowering rates encourage banks to lend money?

[gravity]

1. They can borrow money at a cheaper rate

which means they can lend at a lower rate

[pokerfan]

2. But they've been handed $350B with no strings attached

or at least very few strings, i.e. free money. Doesn't seem to have loosened anything up.

[gravity]

3. In normal times, it would have loosened up credit

The problem is that banks don't want to risks lending the money, and would rather hold onto the capital to protect against possible losses. They don't want to be the next bank to go under.

The Fed is trying to do whatever it can to get the credit flowing to stop the downward spiral in the banks. Many of the actions they are taking are unprecedented, like assuming some of the risks of the banks.

[SoCalDem]

4. Think of it like this:

You're drowning..and there are sharks circling..and a boat comes alongside...a guy leans over the side, reaches out for you...there's something in his hand... He's offering to sell you a new swimsuit..for 50% off:)