Understanding the Housing Bubble in 4 Steps
Economist Mark Thorton explains with the graphs and an interesting video.
Here's the biggest culprit in the current climate:
Adjusted for inflation, we had negative interest rates during a period of time. That would mean something along the lines that less than NOBODY wanted loans in supply/demand driven rates and thus that we were paying people to take loans. Hmmm. Hardly the case in reality.
See link for the other graphs on the 30 conventional mortgage rate and total loans written. Be sure to watch the video. Pictures speak thousands of words. Simple videos say even more.
Submitted by John on Sun, 2008-09-28 10:21
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What's wrong with low interest rates?
That sure was a nice roller-coaster ride.
What I failed to notice in all those graphs is what the interest rate should have been. How do we know that the bubble was caused by artificially low interest rates, rather than interest rates being low due to market forces (such as massive savings by China)?
This seems to be your answer:
Are you saying that the market cannot possibly produce negative interest rates? If so, why?
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
negative interest rates
Just in case the issue here is negative interest rates, this blog
sums up my thoughts on the issue:
Edit: More thoughts on negative interest rates
...focusing on how they pump up the price of easily storable commodities. FWIW, other sites talk about negative interest rates in Japan being indicative of an absence of investment opportunities (and maybe future income also).
Edit2: Cowen on negative interest rates
.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Nothing is wrong with low interest rates
in and of themselves. But that misses the point. It's not about whether we like low prices or whether there's something "wrong" with them (and interest rates are simply a price for borrowing money), it's about whether prices reflect reality and whether they are produced by market forces or by fiat. We have the latter: fiat.
Look at gas, there's nothing "wrong" with low-cost energy...so long as the price is justified by reality. But if gas were forced to be sold at $1.30 per gallon right now, we'd have a lot of problems trying to keep it that way. Just imagine. The pandora's box is endless in terms of trying to imagine what would happen and how we could do it.
Money and interest rates function the same way. The difference is that we are able, through central banks to make not SEEM so because we are dealing with something that can be created without resources. It provides a false sense of control.
And those interests rates were manually cut. They are not the results of some uncontrollable market force.
Nobody can really know what the exact interest should be...just like nobody can really know what the real price of a brand of shoes are without letting forces play out without the control of a central shoe-pricer. Our system is not one whose goal is to produce the real interest rate. Far too many factors are at the whims of individuals.
what is the real interest rate?
First, what is the goal of interest rate setting? I seem to remember that the Fed is known for focusing on unemployment and European banks focus on inflation. I don't recall if that is tradition or explicit policy.
Anyway, this raises the question of what is the real interest rate?
Your theory defines optimal prices as unknowable. That's fine for theory, but it leaves us unable to say whether the Feds have kept the rate too high or two low.
It also raises the question of whether it is possible to have a free market in money. I have a hard time getting a sense of what money really is (and it seems that many economists do too). If money were something created, traded, and consumed by individuals then a free market would make sense...but it if is a social institution, then its management is simply a social/political issue, and the only question is whether our policies are futhering our goals (such as maintaining market liquidity).
I assume that you adhere to some Austrian interpretation of money and how it should be managed. I have to admit, I'm not familiar with those proposals...I think I've heard some talk about commodity-backed money from pro-Austrians (such as Ron Paul), or perhaps an emphasis on managing fiat money so that there is low inflation.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
what's the real rate?
that's like asking the real price of a good in a communist country.
But there are ways to sorta have a somewhat free market system. Free banking is one way. Species backed currency whose value or supppy cannot be set on a whim is another.
They are not far fetched ideas... yet they are somewhat hard to have serious discussion over because central bankers lose control. And they need control now more than ever to deal with the mess they've created because the mirage it has built up would be exposed and pain and adjustment would be immense.
real price of a good
You may not be able to measure the "real" price, but you can see if the nominal price is too high or two low based on the presence of a black market (too high) or shortages (too low).
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
But a black market always has a higher price
when dealing with controlled goods. The price reflects a black market risk premium because it's not part of the open legal market. The black market price reflects a value UNDER THE CIRCUMSTANCES OF A CONTROLLED MARKET. Since prices are all messed up in a communist system, we only what people are willing to pay because normal legal channels are tainted (black market price) but not what the price would be under a freer system.
Rothbard on money
For what it's worth, I just read Rothbard's essay The Austrian Theory of Money.
While he effectively illustrated how fiat currency presents a risk of corruption resulting in currency collapse, he didn't convince me that commodity based currency is any better.
Two concerns arose directly from his essay:
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Yes.
Yes. That could happen. But so what? It's better than a distorted currency which transcends certain luxury commodities. Priorities.
Hmmm.....
negative interest rate..... or cheap debt.
Credit can equal spending with no real investment no matter if the interest rate is positive or negative
Does anyone now think that owning a home is a liquid asset, as was liberally advertised and relentlessly promoted?
The only liquidity in 'the system' has been credit debt. The whole country gorged on it, with the oddly unsound philosophy that you can borrow forever and when the bill comes you can hide it with more credit/debt.
Credit debt does not equal investment, IF you can't sell it, but it does equal spending, no matter what the interest rate. (See banks) We have been spending to invest in debt.
Profits have been measured in interest fees for credit/debt without any real investment, other than selling debt. That is not a real investment.
It is ironic that the only sound spending has been the 'investment' in our government, known as taxes, apparently the only source of real true liquidity available.
It is the economy, stupid.
Will you please speak in clear terms and not pig latin...
...or whatever it is you're speaking...
Credit can equal spending with no real investment no matter if the interest rate is positive or negative
What? Please explain in clear terms what you are suggesting?
Does anyone now think that owning a home is a liquid asset, as was liberally advertised and relentlessly promoted?
Of course they are, 90% of people are paying theirr mortgages, and will continue to do so and like the DOW it will be the best investment of their lives. Most home owners have substancial equity in their homes.
The only liquidity in 'the system' has been credit debt. The whole
country gorged on it, with the oddly unsound philosophy that you can
borrow forever and when the bill comes you can hide it with more
credit/debt.
This are the very people causing this crisis. Those that thought the upside would go on forever...The low income people who thought they could refinance themselves into eternity. But again, 90% of us are not that way, it was the forced lowering of traditional lending standards that is the culprit.
Credit debt does not equal investment, IF you can't sell it, but it
does equal spending, no matter what the interest rate. (See banks) We
have been spending to invest in debt.
Profits have been measured in interest fees for credit/debt without
any real investment, other than selling debt. That is not a real
investment.
...WTF? Ok, please talk in terms that we can understand what you are actually saying? And not have to guess..?
It is ironic that the only sound spending has been the 'investment'
in our government, known as taxes, apparently the only source of real
true liquidity available.
Oh my..where do you get this stuff?
“Back in the thirties we were told we must collectivize the nation because the people were so poor. Now we are told we must collectivize the nation because the people are so rich.” ~ William F. Buckley, Jr.
A Trillion won't be enough
to reset the credit crises of investment banks, it might be enough to shore up the dyke before the hurricaine hits. Then we can slowly bail out for years. This financial storm will create waves for decades.
The negative interest (?!) you describe was intentionally let loose upon the mortgage lenders (Hello Mr. Greenspan) to get folks to gorge on credit. They took their chunk and their self interest was served.
If you understand how much of this known bad paper was pushed into Credit Default Swaps, and then astonishingly insured by AIG, at a leverage of approximately 3 cents on the dollar, a trillion dollars is a drop in the bucket.
Here
is an enlightening article about a little faction of the brain trust, 377 individuals working for AIG out of London, that helped create this mess.
This is NOT a sub-prime mortgage crises. Nor is it a housing bubble. It's a credit bubble.
This is a statement of blind denial by one of the leading lights in the creative class of investors at AIG, in 2007. Again astonishing in it's complete denial that the credit swaps were wholly insured, no worries, and were not taking the financial system down the toilet.
Got that, without being flippant.........! It's hard for us to see any kind of realm where anyone could lose every one dollar!
What a crock-o-crap!
Mr. Greenspan where are you now?
It is the economy, stupid.
you may like "The Black Swan: The Impact of the Highly Improbabl
The Black Swan: The Impact of the Highly Improbable
I'm not far into it, so I'm still not sure that it isn't BS, but it looks really interesting so far.
I hope to write up a little review for you guys when I'm done.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Thanks!
I will look forward to reading it!
It is the economy, stupid.