Feedback Lost — Interest Rates
A Concise Case Study on Suppression in the System
Every human interaction creates some level of feedback by default. But many interactions in our world suffer from constraints that cause suppression. When feedback is suppressed, systems under perform or break entirely.
In a society where freedom and free markets have come to dominate most aspects of life, it is surprisingly easy to find examples of suppressed systems that still maintain scale and prominence. This is because our governments generally act to maintain and often save these systems.
Laws and regulations would be an easy target for this discussion but wouldn’t serve our efforts to learn about our own companies and businesses, unless you have several lobbyists or corrupt politicians in your back pocket. One process that many people don’t see as a feedback loop will — interest rates.
As you read this article, think about your own products and services. Have you made decisions that suppress feedback? Are you making it difficult for yor customers or clients to inform you? Well here is a great example to learn from:
Information and Money
Read most any article on a successful entrepreneur and you will inevitably hear the retort — I view money as a scorecard. While this speaks to the competitive nature of most entrepreneurs, it also speaks to the information value of money.
When you spend your money, you are telling the world what you value. Money is feedback and a very honest one. Only time, health, and family are more precious and then only to most people. Money is not an easy asset to come by, but unlike those others, it is not capped.
Interest Rates
Interest rates are feedback on the growth and value of money within our societies. They are a measurement on how society is leveraging our money supply. Over leverage drives rates higher.
This creates a complicated dynamic. If you view interest rates as the price of money, they should rise with demand (which they do). However, because they are also a feedback mechanism on leverage and risk, they also rise with supply. This dynamic has created just enough confusion to mobilize governments around the world… to make it worse.
Central Banks
Enter the central planners. These include the bureaucrats from the Federal Reserve, central banks of Europe, and the State Planning Committees of China. They view interest rates as their mechanism for controlling their economies. Given the complex nature of interest rates, I am not sure how they think that can really work… but that is a topic for a different article.
In their attempt to control their economies, central banks set interest rates for the banking industry. The banks in turn, modify their lending behavior as a result. While private enterprise and world markets can still provide some feedback on how those rates move through the system, feedback is effectively muted. But not quite enough… at least for our planners.
Guarantees
Often the planners lower rates in an attempt to get more money in the hands of more people. The goal is stimulate the economy. The risk is over leverage. In response to the risk, some loans are still made with higher interest rates. The lending industry is providing feedback that they see a danger of non-repayment.
Enter the central planners. These include the parliaments, congresses, and other government administrations of the world. They offset that perceived risk in the form of lending guarantees. By assuming the risk for the banks and private lenders, they lower the interest rate. Once again — feedback is muted.
Fair Lending
But our central planners are not done. Guaranteeing loans can be difficult and costly. The disaster of 2008 proved that. In an effort to further control interest rates without the need to financially back loans, they simply pass laws to prevent private companies from setting them too high.
In the US, this is branded as Fair Lending. It exists under other names throughout the world. Lenders are told that interest rates cannot exceed certain levels. They are told they can not use other types of feedback when making decisions because those methods are ‘unfair’. Once again-feedback is muted. Although sometimes lenders react by simply not lending-creating binary feedback.
So ask yourself this question?
Is your business suppressing feedback? Most business set their prices in a very centrally planned fashion. They rely on quarterly sales numbers to make corrections. Their feedback is muted although likely not as extremely as our example. What can you do to collect greater feedback and remove suppression? Organization that can will have a huge advantage.
Feedback Lost is a ongoing series provided by Corsair’s Publishing. We seek to provide engaging content that is both thought provoking and entertaining. Other articles on related topics can be found within our other Medium publications.
