In 1981 more than 2,000 construction firm* went out of business. They went broke
ID: 1199349 • Letter: I
Question
In 1981 more than 2,000 construction firm* went out of business. They went broke because housing construction fell to the lowest level in years, with hundreds of thousands of construction workers out of a job. The National Association of Realtors lost 70,000 members between 1978 and 1981. Other industries also had high mortality rates. In 2JAyears some 2,600 automobile dealerships closed their doors. There was a 41% jump in business failures in 1981 as small businesses and farmers suffered foreclosures. This havoc In the business world was not caused by a major depression but rather by sky-high interest rates-rates as high as 23% for construction loans alone. Potential housing buyers were unable or unwilling to take out mortgage loans at interest rates of 16% or 17%. Consequently, many construction firms were forced into bankruptcy by the banks that underwrote their construction loans. New car dealers were in the same sort of bind, often paying $142 a month in interest costs on every $10,000 automobile they had in inventory. With new car sales moving so slowly, the interest costs simply became more than many dealers could handle. It was previously unheard of for established businesses with excellent credit ratings to pay a prime rate over 20% as they did for a short time in 1981. Home builders, farmers, and other small businesses frequently had to pay a premium of 2 or 3 percentage points above the prime interest rate The super-high interest rates were a part of the government strategy for bringing down the inflation rate. It was a strategy that exacted a high price from thousands of small business owners. With escalating government debt in the early 1990s, the question that is being asked is whether we will repeat the sky-high interest rate experience of a decade earlier.Explanation / Answer
1. The reason that shows intreset rates to be high in 1981 due to Federal Reserve open market operations. There was loss because the farmers had suffered immense loss in thier occupation. This disabled them to grow crops and sell them off field. The open market operations results in raising the interest rates paid by the businesses as there is more transactions done by public. This enables the traders to earn more from the intreset incured.
2. The consequences of wide fluctuations shows high rate of mortality due to high rates of intrerest. This could be avoided by controlling the prices of goods.
3. The objective of controlling the money supply would justify the swing in the interest rate as this would save the income of people. This enables them to spend money on the products with high rate of interest.