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by saint_abroad 2816 days ago
> The crash of 2008 wasn't so much averted as postponed.

This.

The US housing market correction from 2006 was 30%. In this time, the US Fed funds rate went from 5.25% to 0.15% cutting banks' monthly cost for a $250k loan from >$1k/m to <$50/m.

In the meanwhile, median LTV has gone from 80% in 2007 to 95% in 2017 [1] and median loan sizes have gone from $175k to $325k. What happens when interest rates normalise and mortgage interest doubles?

The banks have been propped up but the risks have not left the system.

[1] https://www.urban.org/research/publication/housing-finance-g...
1 comments
a008t 2816 days ago
Why would interest rates "normalize" though?
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sct202 2816 days ago
US Federal Reserve rates have been increasing so banks get loans at higher prices which means consumer interest rates will also increase.
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a008t 2815 days ago
But the Fed cannot just arbitrarily set rates, presumably? There is some "real" rate in the economy, which is determined by supply/demand of capital at different maturities. If the Fed goes significantly below or above that, you should get price inflation or deflation.

Some people argue that interest rates are objectively low because we are in secular stagnation - there are loads of savings, but real economy growth is sluggish which means there are few investment opportunities, leading to low interest rates (e.g. https://www.morganstanley.com/pub/content/dam/msdotcom/ideas... - may not be the best link, I have seen the ideas elsewhere).

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saint_abroad 2815 days ago
> But the Fed cannot just arbitrarily set rates, presumably?

They absolutely can, by quantitative easing (aka large-scale asset purchases) buying $4 trillion of bonds priced to keep yields in range. This market can remain irrational longer than anyone can remain solvent.

By price-fixing this market they stimulate liquidity. Institutions (such as pensions) that would normally buy safe bonds are forced to invest elsewhere at marginal yields (ie. corporate bonds and MBS). Other, more risky, investors chase growth stocks with marginal yields.

> you should get price inflation or deflation.

Indeed there has been, though currently visible only through asset prices such as bonds, stocks, securities and housing. Who can complain?

The danger comes when the tide goes out and yields go up [1]. All that extra liquidity washes from assets into yields, thereby driving inflation on produce.

[1] And up yields must, to determine how much have been swimming naked.

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