Tuesday, September 30, 2008

Real Estate Roller Coaster

The Housing Bubble in 4 Easy Steps, from the Mises Institute:

1. Cut Fed Funds rate from 6.5% in 2000 to 1% by 2003.
2. 30-year mortgage rates fall to all-time low by June 2003.
3. Because of low interest rates, mortgage loans double between 2001 and 2006.
4. All these low-interest loans had to be extended to people with weak credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed. Click on the arrow below to the Real Estate Roller Coaster:

Fannie Mae, Freddie Mac, mortgage-backed securities, and credit derivatives were simply the conduit that made all these bad loans and investments seem less risky than they really were. In this manner the Federal Reserve can fool the market, at least temporarily. In the end the market always reasserts itself.


At 9/30/2008 7:11 AM, Blogger Arman said...

I'd like to see some backup data/charts showing how much of that "mortgage loans doubled" took place during the time when the interest rates were low. Banks do not create more loans when they are earning less money from them! DUH!

At 9/30/2008 7:43 AM, Blogger Malachi said...

arman, what matters to banks is the credit spread between what money costs them and how much they get in return.

But in this case concerning MBS, the banks were middle men who made money on the transaction costs.

At 9/30/2008 7:49 AM, Blogger Malachi said...

What I'd like to see but apparent will not happen is an acceptance that the business model of borrowing short to lend long is a failed business model.

We've known this is a failed business model for literally centuries now yet for some reason we keep using it.

There are other ways of making long term money available that will still provide liquidity to investors without the systemic risk.

At 9/30/2008 8:02 AM, Blogger Arman said...

"arman, what matters to banks is the credit spread between what money costs them and how much they get in return."
Banks create money when they create a loan. Money is the backing of the bank, and is backed through the bank to the collateral used in securing the loan. Money is not a creation of the central bank. They are just a print shop that the local banks are obliged to use.
When the Fed lowers the interest rate, it does almost nothing to the costs of the local banks money creating activities, but only makes these activities less profitable.

At 9/30/2008 8:50 AM, Blogger K T Cat said...


At 9/30/2008 9:22 AM, Blogger Arman said...

can you expand that statement a bit?

At 9/30/2008 11:26 AM, Anonymous Anonymous said...

Yes, now you're seeing the significance of the credit bubble. Welcome to where Austrians have been for years!

At 9/30/2008 3:27 PM, Anonymous Anonymous said...

Carpe Diem is an ivory tower twit. The roller coaster real estate ride was posted on the intertubz 18 months ago.

At 9/30/2008 4:37 PM, Anonymous Anonymous said...

"Ivory tower twit"

Ad hominem. Attacking your opponent is a third rate form of argumentation one usually leaves behind in grade school.

Why are you wasting my time?

Ok, you don't like CD's position. Got that. Deconstruct it, and refute it.

There is nothing that turns people off more than anger. When you lose it, you undermine your own position and the audience just turns off.

Ok, so you don't agree. Why not? Tell us why the scenario presented is not valid, incomplete, inaccurate, non-representative, etc. with data to back up why you think so.

Cool your jets and instead try taking the legs off the argument.

At 10/01/2008 3:47 AM, Blogger Arman said...

The notion of a business cycle (which the Austrians are quite into) is fictional. Economic trends do not happen without firm and understandable reason. Trends are insidious, and just because most economists do not understand economics well enough to tell you exactly why a trend changed, it should not be claimed that it just happened... that it just goes up and down because it does. That is a begging of the question. Stating that prices will probably fall off some time in the future does not indicate a comprehension of why prices of this or that should fall off.


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