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Experts are bufuddled and borrowers are battered

Everywhere President Reagan goes, people ask him the same question: Why are interest rates so high? A recent visit to an eighth-grade civics class at St. Peter's School in Geneva, Ill., was no exception. Sitting on the edge of the teacher's desk, next to the world globe, Ronald Reagan patiently explained that interest rates are still steep because the financial markets expect Government policies to spark a renewal of rapid inflation. "We're trying to convince them that isn't so," said the President. "And I think pretty soon, when we announce a bipartisan agreement on what we're going to do with regard to spending and taxes, then maybe the markets will get some confidence."

If the 22 attentive youngsters were more confused than enlightened by the President's explanation, they were not alone. Everyone who needs to borrow money, from struggling small businessmen to families who want to buy homes, is bewildered and frustrated. Interest rates have stayed up even as inflation has gone down dramatically. The cost of money has historically been only two to three percentage points above the rate of price rises. Now interest rates are an astonishing 15 points above the inflation level of the past three months.

Most economists predict that continued slow inflation will result in some interest-rate relief by summer, but they also warn that the prospect of a 1983 federal budget deficit that could run as high as $180 billion may send the cost of money surging once again by the end of the year. In testimony before Congress last week, Murray Weidenbaum, chairman of the Council of Economic Advisers, urged the lawmakers to reach a compromise with the President that would cut the deficit. That, he said, plus the decline in inflation, would bring down the cost of borrowing.

Since November 1980, the prime rate that banks charge for corporate loans has never gone lower than 15½%, and it now hangs at 16½%. Only a decade ago, by contrast, the prime was as low as 5%. Mortgage rates now range up to 17%, more than double what they were in 1972.

Developing theories to explain why interest rates remain so lofty has become one of the few growth industries in today's economy. Depending on which expert is talking, the responsibility for high interest rests with Reagan, the Federal Reserve Board, Congress, the banks, inflation or all of the above. No matter how convoluted the theories, though, they all revolve around a simple principle: interest rates, which are the price for borrowing money, are determined by the balance between the supply and the demand for credit.

The supply of money for loans comes from two main sources. The first is the savings that individuals, families and firms deposit with banks, insurance companies, pension funds or other financial institutions. The second source is the Federal Reserve Board, which has the job of expanding the total U.S. money supply to meet the needs of a growing economy.