Friday, April 3, 2009

Inflation and Banks

Here I discussed why the prospect of inflation is worrisome to people like me who benefit from fixed income streams. There is another reason to be worried about future inflation. Banks are currently making a lot of 30-year mortgages at low interest rates. They for the most part are not funding these mortgages with 30-year CDs, instead they are using shorter term deposits. But this means they are vulnerable to increases in short term interest rates which inflation would likely produce. This was a big contributor to the 1980s S&L crisis. When interest rates were deregulated S&Ls were caught with a lot of long term loans paying low interest while they had to pay higher interest rates as their shorter term deposits rolled over.

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