What the credit rating of the US gov't has to do with interest rates of banks and lenders? I would think the interest rate is dependent upon my credit score, not the US gov't credit score.


Yes, I know jack shit about government economics, and pretty much most of the financial industry. I just know how to keep my credit clean and budget my $.

8/9/2011 10:29:52 AM

I, too, think it's bs that our inept Congress can cause consumer interest rates to increase.

8/9/2011 10:33:32 AM

non-expert response: bank debts are backed by government guarantees. If the credit rating of your guarantor is bad, then your risk is higher, thus a higher rate.

8/9/2011 10:37:19 AM

that doesn't make sense to me. how is a loan that the bank gives me a bank debt, wouldn't that be my debt? And would that interest rate be gauged on my credit worthiness?

[Edited on August 9, 2011 at 10:40 AM. Reason : added the "to me" ]

8/9/2011 10:40:34 AM

basically all interest rates in the US are based on a "prime" rate. And this prime rate is based on the interest rates set by the fed. And the fed's interest rates are partially affected by the nation's credit rating, because if people think our gov't isn't trust-worthy, then the fed has to increase interest rates in order to make our debt attractive.

i might have missed a step or two, but that's basically it

8/9/2011 10:44:13 AM

terrible thread title

8/9/2011 10:44:38 AM

Complicated question to a certain extent. But to simplify it, by the US debt being downgraded the US is going to have to increase interest rates on Treasuries. They have to do this to make them attractive to investors. Banks maintain spreads over Treasuries, I think 170bps is the standard. So as interest rates on Treasuries increase, the rates on mortgages increase. There are other reasons, such they must jack up mortgage rates in order to be securitized, packaged and sold to investors (ie MBS securities). There are certain risks associated with MBS (prepayment risk, credit risk, etc) so the market essentially demands a higher interest rate to compensate them for taking on that risk. This is as opposed to Treasuries which are supposedly no risk investments.

8/9/2011 10:44:55 AM

another non-expert:

The FED borrows money from other Countries giving them Treasury Bonds.
The FED has to pay service on this debt when it comes due. (there is continually revolving payments of Borrow - Payback - Borrow - Payback)

Smaller consumer banks borrow money FROM the FED.

Because the FED got downgraded, they have to pay more service on the foreign debt. They are not just gonna eat this, so they pass it along to the smaller banks, who passes it along to you.

8/9/2011 10:44:58 AM

well shit then.

8/12/2011 1:10:50 PM