Alpine Summit

Friday, November 28, 2008

Doing the Right Thing

It seems that governments around the world are on the right track with this financial problem by cutting rates.

For those of you not cool enough to have majored in business or finance in college, cutting federal borrowing rates means the benchmark for all rates in a given country are lower.  THIS means that it is cheaper for people to borrow money and makes borrowing more attractive for the entrepreneurs of that country.

Again, what does this mean? Well the level of economic prosperity or growth can be tied to the level of lending and borrowing going on in a country.  No business ever grows without spending more than it is making to simply do business.  Many times, profit margins are so thin that businesses can't wait to build up the cash it needs to expand or grow, so it must borrow.  This gets into time value of money and other complicated things I won't go into-- if you're interested, I'm sure Wikipedia can tell you what you want to know.  Bottom line, if there is more borrowing/lending going on, there is better economic prosperity (assuming the loans are to relatively low-risk borrowers :ahem:).

So the fact that countries are planning to either leave their rates unchanged or drop them should help businesses find some modicum of firm footing to recover.  This means that as long as government provides the benchmarks on which the private sector can rely, this economic problem can easily be resolved.  The trick is to keep politicians from thinking they're in charge of anything and simply let businesses sort this out themselves while providing the best possible conditions FOR businesses... after all, they (businesses) are the experts!  Trillion dollar bailouts are certainly not the right answer.

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