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Interest Rates Without Fed Manipulation
invite response
2009 Sep 21, 1:31pm 16,150 views 57 comments
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Oh yeah and the lady I spoke with today said that the lower interest rates you have, the lower the home prices will be. She was lying all over the place!! She was an assistant for Centex Homes.
Why, what bakes any bubble is the ability to create BAD credit.
When lenders know they can make bad loan with no risk, when they know they always can pass the risk to somebody else or force a bailout, they always create bubbles. Always, no exceptions!
All the rest: interest rates, lax standards, greed, fraud, stupidity, and the rest of the speculative demand, - all these are just tools and ingredients.
Oh yeah and the lady I spoke with today said that the lower interest rates you have, the lower the home prices will be. She was lying all over the place!! She was an assistant for Centex Homes.
She was not lying - at least about that. She was stating a fact, when comparing differing interest rates to the SAME selling price. After paying down the mortgage for the same number of years and other terms being equal, the lower interest rate will always result in lower total interest costs, resulting in a lower total purchase price at the end of the term. Don't confuse this with what some of us have been saying about lower rates coupled with HIGHER prices.
tatupu70
2009 Sep 24, 11:10am
Justme--
I apologize if I'm not engaging in straight talk. Sometimes I try to be overclever. I think that interest rates had a very minor effect on the bubble. I think poor understanding of risk had a HUGE, major effect. Like I said in my last post--take a look at this bubble. It popped, not because of rising interest rates, but because of defaults/foreclosures. Because there were so many ridiculously crappy loans written.
I will agree that low rates create an environment of rising prices which would probably make a bubble slightly easier to form. But, look again at the housing price history graph--there was a bubble in the late seventies while mortgage rates were high. So I don't think it's a necessary condition.
And your last statement about 0% interest is an interesting one. That gets to the crux of what I'm saying. Housing prices would certainly increase, but they should increase. Just because prices increase, it doesn't mean that's it's a bubble situation. A bubble implies that the free market isn't working and people are acting irrationally.
Hopefully that makes sense and a cake is a cake again.
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Here's a thought experiment: what would interest rates be if the Federal Reserve did not manipulate them?
Perhaps the Fed does actually have a useful function in being "the lender of last resort" during panics, because panics are by definition irrational, so the market is just not working at that point.
But I'm not sure there is any coherent argument for why we need the Fed to deliberately destroy the free market in money itself. Playing with interest rates to suit a few mysterious bankers on the Federal Open Market Committee does not seem to be in the national interest.
The official site of the FOMC says that they "influence the availability and cost of money and credit to help promote national economic goals." Are they really promoting national goals, or are they promoting banker's goals? The Fed has clearly not been effective at the national goal of avoiding the housing bubble and the resultant fallout.
If we had no Fed manipulation of interest rates, we may have had a slower time coming out of the dot com crash because of high interest rates, but we also would not have had this housing bubble. Those who saved would be able to buy, and those who foolishly went into debt would be forced to rent -- not the end of the world.
It seems clear that the Fed's overriding goal is to get as many Americans as deeply in debt as possible, so that banks can earn as much interest as possible. The Fed does not want defaults, but it also does not want Americans to be free from mortgage debt.
These bubbles are not new. Nineteenth century businessman Walter Bagehot's advice during panics to "lend freely but at a punitive rate" seems like the best advice. But it is only half obeyed by the Fed. The Fed lends freely, but at a rate near zero percent. The Fed should be constrained to lend at higher than market rates, or not at all.
#housing