Why do interest rates go up when economy expands?

[Ivan Jouikov]

This has been on my mind for a while.

If economy is expanding, shouldn't there be more money flowing around, hence more people with money, hence more competition in the private lending arena?

Now I understand that the fed regulates "prime" % at which they lend to the big banks, so they lower the rate when the economy needs "easier" financing in order to be stimulated, but that has nothing to do with private lenders.

So, my question is - when the economy is expanding, shouldn't HML become Easy Money Loan?

[Jim Wineinger]

Ivan, you need to reverse your thinking on hard money loans.

Basically those that use hard money loans are those that can not qualify for the easy money loans wheather those loans are easy to get (lower interest) or harder to get (higher interest). Because they can not qualify for the easy money loans they then turn to the "hard money loans" which means they are a riskier loan. Because the HML lenders are taking a greater risk than the easy money lenders they do require a greater return on their money.

It is not how easy or hard it is to get the money, but how hard it is to find the individuals and convince them to loan you the money that makes it a "hard money loan".

These type loans will always be towards the highest interest rates allowed. Since there is a lot of demand out there for such loans as they are the riskier loans.

Also a lot of HML's are like Hedge funds which the managers of are required to get the most in return for their group of investors. Therefore it will always be higher than the other ways that they could make their interest such as long term CD's and tax free high interest bonds, ect.

I hope that helps in understanding why the private sector loans are not tied to the normal thinking of the FEDS in interest as they are not "conventional" in their conception but PRIVATE and therefore only between lender and borrower until they break a law such as a usuary law.