[jrwoodruff]

I think the answer to that is they've made it a lot easier to borrow a lot of money very cheaply. I'm pretty sure when my parents got a mortgage 25-some years ago, the interest rate was around 18%. I wouldn't be able to afford my house at that rate. I'm sure this same cheap money has helped finance many people who build things, then helped them set up plants in China and Mexico as well.

Whether cheap money is a good or a bad thing in the long run, I guess that has yet to be seen.

[MichaelApproved]

Banking innovation did not solve your parents 18% mortgage problem. Interest rate is mainly based on the economic situation and government manipulation.

[orangecat]

I wouldn't be able to afford my house at that rate.

We'd be far better off if fewer people had been able to "afford" to buy houses in the last 10 years.

[pyre]

I'm pretty sure that the 18% interest rate wasn't true in the 90's...

[jbooth]

Well, mortgage interest rates are based on inflation plus a couple points so the bank still comes out ahead. In the early 80s, inflation was around 10-15%, hence an 18% mortgage. Now, it's more like 3-4%, hence a 5-6% mortgage.

Maybe they've made some bookkeeping and overhead improvements that allow them to add a point less or something like that, but it's not like they had some genius idea that allowed them to lower from 18 to 5.. it's just tracking the inflation rate. (and/or the fed funds rate which is related to inflation).

(Side note: my ATM snark was stolen directly from Paul Volker, who was the guy who stopped inflation in the late 70s early 80s by jacking up the fed funds rate. Credit went to Reagan of course. Better hair.)

[stretchwithme]

Rates are not directly dependent on the inflation rate. Yes, in the real world they are, but the Fed can set them wherever they want and have been doing that.

In fact, the lower the rate, the more we all borrow and bid up prices for things. Most of that inflation since 2001 has been in things that the government likes to overlook, such as oil and housing. But the inflation does actually exist, whether they wish to ignore it or not.

Going to market rates would go a long way to fixing the distortions, to be sure. But many things would not survive in that environment and have only been viable because they've been able to shift the true cost via inflation to the larger economy.

[jimbokun]

"Credit went to Reagan of course. Better hair."

Credit went to Reagan for selecting Volker and letting him do his job.

[jbooth]

Carter selected Volker.

[Bricejm]

Your parents home is also probably worth 5-10 times what they paid for it. Housing prices increase as interest rates decrease. Homeowners are still paying the same monthly bill (adjusted for inflation) but they're just paying more for the house vs. interest. This is also why banks pay such poor interest rates on savings & CD's. As the cost of money decreases, so does rate of return on other banking products.

[kevin_morrill]

We can give Alan Greenspan most of the credit for that. Given the fallout, I am not sure it's much of an honor.