Why do business men refuse to apply for bank loans during economic depressions?Despite the fact that the bank interest rates are extremely low? | |
Why do business men refuse to apply for bank loans during economic depressions?Despite the fact that the bank interest rates are extremely low? | |
This ia because the Marginal Efficiency of capital lower than the interest rates. charged BY the Banks.
Marginal Efficiency of capital means the rate of return over the capital invested.
During depression more and more Industries are getting closed and the income with the individual is coming down and generally the demand FOR all factors of production goes down and this results in less income for the above which leads to fall in Aggregate Demand and hence offered there is no one is wiling to purchase the goods or services and that is why Business man refused to apply for bank loans.
There is no demand for his products. Theoretically, the value of marginal product of capital is lower than the interest rate. But on the other side of the equation, the banks have seen much higher risks to give loans. Even when the FED has lowered the rate to almost zero. The banks,on the contrary, give new loans to fund managers who have found the niche in the emerging market. That is why the dollar has depreciated everytime the FED announces new QE.
there are two reasons ( i think I replied this long back)
1. If recession doesnot show recovery, there is likelyhood of cheaper loans in near future
2. during recession ( which is negative growth), chances of incurring losses are more than earning profits, so no point in expansion by borrowed money.
3. Which i add now, ( if this Q is from banker) is that bankers if want to dispose of money gathered by widened money base - they must study sectors and industries performance during recession and woo those profit makers to expand - that will improve chances of recovery from recession.
Oh, you said depression - that's only severe recession.
Why do you say they do?
How do you know they don't apply and get turned down?
Some do.
As for those who don't apply, why would they apply for loans, when they don't have enough demand to keep them in business at their current size; they aren't in a position to expand when there isn't enough demand for what they do at their current size.