The Cause of the Financial Crisis (dart)

[_TAK]

I’d suggest that low interest rates have the following negative effects:

1- Increases the price of houses without increasing its real value; since people typically buy houses in monthly payments, their demand function is driven by the monthly payment more than the total price (e.g. a $1,500 payment will borrow $280,000 and 5%, but only $171,000 at 10%. When the interest rate goes from 10% to 5%, the price of the house goes from $171,000 to $280,000, for the same house).

2- Discourages savings.

3- Encourages borrowing.

4- Encourages leverage and speculation. If you want to make a half-decent return, you need to find something other than an investment-grade bond.

The housing bubble was the prices of houses getting too high, and the problem was exacerbated by people saving too little and borrowing too much. Low interest rates had a lot to do with this.

I would not disagree with most of what you have said except what fueled prices far greater were many people speculating on housing - lining up to buy new homes as investments thinking they can flip before they close and for a time they could or keeping it and renting it out even though they said they were going to live in the properties. Also far worse were lenders giving cheap short term loans to anybody and not qualifying..That too fueled prices.

If you think a 10% mortgage is better for the economy than a 5% (which was rare except for a teaser rate..) then by that logic a 15% rate would be better. It would not. I was in college in the late 70s early 80s and so I remember the world of 21% interest rates... We were in a recession and that’s what high rates bring.

[_TAK]

It's economics 101. Interest rates are lowered to 'spur' economic growth, which leads to inflation. Rates are raised to stem growth, and curb inflation.

If rates are too low, for too long, it'll be bad for the economy. And vice-versa.

I don’t know where you took 101 but a component of inflation is interest rates..
Beyond that Inflation has been held in check for the last 15 years of relatively low interest rates.. and has only spiked recently because of the effect of rising fuel prices. By the way high interest rates also negatively affect stock prices.

[_Who Knows]

I don’t know where you took 101 but a component of inflation is interest rates.
Beyond that Inflation has been held in check for the last 15 years of relatively low interest rates.. and has only spiked recently because of the effect of rising fuel prices. By the way high interest rates also negatively affect stock prices.

Um, ok, what's your point? Are you disputing what I said?

[_Who Knows]

If you think a 10% mortgage is better for the economy than a 5% (which was rare except for a teaser rate..) then by that logic a 15% rate would be better. It would not. I was in college in the late 70s early 80s and so I remember the world of 21% interest rates... We were in a recession and that’s what high rates bring.

Well that's silly. So by your logic, a 0% rate is better than a 5% rate? How about a -5% rate. That would be even better, right?

[_TAK]

If you think a 10% mortgage is better for the economy than a 5% (which was rare except for a teaser rate..) then by that logic a 15% rate would be better. It would not. I was in college in the late 70s early 80s and so I remember the world of 21% interest rates... We were in a recession and that’s what high rates bring.

Well that's silly. So by your logic, a 0% rate is better than a 5% rate? How about a -5% rate. That would be even better, right?

If you can find someone to lend you at -5% you would pass on it?

[_Analytics]

I would take issue in the opening post that states we have an "unregulated free market". This statement is ridiculous at best. From a financial statement perspective, as a CPA, I can tell you that the rules surrounding financial statements are stifling and almost impossible to keep up with as they multiply every year. Go pull open the tax codes, the SEC guidance, and all of the various accounting agencies that make up GAAP that cover every industry. You couldn't read it all in a lifetime. That doesn't even include all of the other regulatory type agencies that affect operations such as the EPA, OSHA, the FDA, etc etc. They you have State agencies on top of all of those. Unregulated? LMAO.

The specific "unregulated free market" I was talking about is the mortgage and mortgage-backed securities market. Laugh your ass off all you want if it gives you jollies. Citing the EPA, OSHA, FDA, and tax codes as evidence that there was meaningful regulation on the failed derivitive markets the American tax payer is being asked to save? Give me a break.

Now, if you were a CPA who actually knew what you were talking about on this issue and wanted to blame the rules for the mess, you would have cited FASB 133 as a main culprit. A decent argument could be made on that front, but you didn't even mention it. You have no freekin idea what is even going on.

The problem here is that the credit and mortgage industries have not been "free" for a long time. Goverment has been deeply involved for many many years, from Freddie Mac and Fannie May to legislation such as the Community Reinvesment Act...

The government forced Freddie and Fannie to be more conservative than they otherwise would have been. The Community Reinvestment Act had very little to do with the current crisis.

It is an undisputed fact that the federal government pressured and incentivized banks to give money to people who in a real "unregulated free market" would never have received the money. These loans are now going bad (surprise) and people want to blame capitalism and the "unregulated free market".

Most of the loans that are going bad were issued by mortgage brokers not even subject the the CRA.

No, lay the blame where it is due. At the feet of government for interfering with the "free market".

Let me guess. The federal governement also forced investment banks to package up these deals. The government forced them to offer Alt-A loans, and forced them to offer 125 LTV loans too, right? The government forced them to continually lower their credit requirements, right? The government forced the investment banks to package the assets into unsound credit enhancement schemes. I bet you think the government also forced the rating agencies to give these securities AAA ratings, right?

And now the government forcing investors to keep away from MBSs, thereby causing the liquidity crisis. It isn't the free-market that is causing there to be no buyers for distressed assets, it is the goverment, right?!

[_Who Knows]

If you can find someone to lend you at -5% you would pass on it?

Of course not. But would i like to live in an economy where 0% rates are the norm? Hell no.

[_SatanWasSetUp]

Is there anyway this can be pinned on DCP?

;)

~Bond

It goes without saying that he was responsible. The fact that he covered his tracks so well is simply more proof of his involvement.

[_Analytics]

It's economics 101. Interest rates are lowered to 'spur' economic growth, which leads to inflation. Rates are raised to stem growth, and curb inflation.

If rates are too low, for too long, it'll be bad for the economy. And vice-versa.

I don’t know where you took 101 but a component of inflation is interest rates..
Beyond that Inflation has been held in check for the last 15 years of relatively low interest rates.. and has only spiked recently because of the effect of rising fuel prices. By the way high interest rates also negatively affect stock prices.

According to Alan Greenspan, "The Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and the Federal Funds rate must rise at some point to prevent pressures on price inflation from eventually emerging." Low interest rates causing inflation is basic.

Here is a link to a PBS show from four years ago with Economists worrying about the interest rates being too low. Paul Sameuelson prophetically said, "Well, if you forget about inflation, thinking that something is taking care of it, then you're going to learn the hard way that it's going to come back."

[_TAK]

If you can find someone to lend you at -5% you would pass on it?

Of course not. But would i like to live in an economy where 0% rates are the norm? Hell no.

Well good news you never will .. that's why your counter argument fails.