When is the populace going to wake up?? Is it that easy to enslave a population??? Apparently so. For what. GS, a piece of shit company that pays out more than 50% of company profits in bonuses??

What if GE did that????

Hang the felons!!! Seriously, the American people need to wake up.

But I digress. BB is ok in my book, just not the best.

No, I’m pointing out that low rates do not, by themselves, create bubbles. It’s obviously false – just look at today’s environment for one example of an environment in which cheap money is not feeding a bubble, or Australia as an example of a market in which money wasn’t particularly cheap yet a bubble was formed, regardless.

Real estate bubbles are fed by easy credit, and creative financing makes credit easier to get, by definition. The bubble drivers were ultimately a legislative failure, and there is little or nothing that the Fed could have done about those. If you want to eliminate bubbles, then place the target on the creativity that allows lenders to circumvent the impact of rates in the first place.

It isn’t that important when the lender can shift the borrower into a different loan type that results in the same or lower monthly payment, irrespective of the interest rate. It’s the monthly payment that matters most, not so much the percentage figure attached to it. That’s how the Aussies and many other countries manage to cope with much more expensive money — they slice up the repayment obligation in whatever ways necessary so that they may successfully back into the rate and achieve the loan volumes that they want.

Interest rates would be quite relevant if all mortgages were all fixed-rate loans with a specific pre-ordained maturity period, because the payments would naturally increase in all cases. But we have used plenty of financial engineering to get around that problem quite nicely. Every car salesman and mortgage broker would understand this implicitly.

The fixation on interest rates is wrong headed. The Fed can play with rates a bit, but retail long-term rates are ultimately determined by the market. Just work a spreadsheet for a bit, and see what happens when you replace a fixed-rate product with a cheaper variable rate one, or when you extend or eliminate amortization.

This phenomenon should be the primary driver for banning alternative loan products — if you did, the Fed really would have some degree control over retail mortgage markets. But with creativity at work, they really don’t have much control at all. With lending markets in their present form, this is a legislative issue, not so much a central bank issue.

You’re implying that the interest rate isn’t a vital component of a mortgage. That is entirely wrong.

As for money flows in the economy and the current low rate environment – it takes years for low interest rates and cheap money to provide the economy with liquidity. It works with a lag. It always has. You can’t just cut rates and expect the economy to boom tomorrow. Just look at the money multiplier. The money isn’t getting off the bank balance sheets because there is no borrowing right now. The case was quite different in 2003 when they cut rates and lending exploded over the following 4 years.

That misses the context of the issue here, namely that they managed to have a housing bubble, even in a high-rate, low-inflation environment. The anti-Bernanke crowd seems to believe that bubbles are not possible with higher rates, but they certainly are — their price increases were quite similar to the US, even though the cost of a typical retail mortgage has generally been above 7%. http://www.aph.gov.au/library/pubs/bn/2007-08/homeloan-1.jpg

The Aussies deal with this higher rate environment by generally avoiding fixed-rate, long-term loans, because fixed rate debt comes at a premium. ARMs are the norm, and there are a variety of loan products that are meant to reduce the monthly payment.

That’s essentially saying that the cost of mortgage doesn’t matter to the buyer.

You’re focusing on the wrong cost. It isn’t the interest rate that drives the transaction, it’s the required monthly payment. And there are plenty of ways to reduce that payment simply by using an alternative loan product.

Combine that with easier credit, and you have the mortgage problem. The market was able to substantially reduce loan payments by using variable rate and interest-only loans, expand the qualified pool by increasing debt-income ratios, and made it easier to put deals together by using high LTV’s to effectively eliminate the need to save for a down payment, and you end up with a hot market.

Just look at today’s market. Money is quite cheap, yet there is no bubble. Banks have increased underwriting standards, and the bubble disappears, even with cheaper money. The cost of money means little when nobody can borrow it.

http://i417.photobucket.com/albums/pp252/pragcap/Aussie.png

To imply that the reduction in real rates had no impact on home prices is just flat out wrong. That’s essentially saying that the cost of mortgage doesn’t matter to the buyer.

The leverage in MBS was a direct result of the combination of poor regulation and low interest rates. All of those ARM loans were made possible by the Fed.

I’m sorry, but that isn’t accurate. The return comes from the spread, and the spreads were actually quite low by historical standards. (If you want to see a high spread credit market, look now.) They were making money through volume, more so than from margin.

This was ultimately a volume business, and the volume came from the loan market’s willingness to buy high LTV products. Had the market rejected high leverage and high income/debt ratios, the market would have been far smaller than it was. But expanding the tolerance of what was defined as an acceptable loan, there was plenty of interest in securitized debt.

Bankers don’t turn bank branches into coffeehouses when rates go up during a boom period, they just change their product mix to accommodate the high rates. The Aussies had a housing bubble with retail interest rates in the 8-9% range precisely because the market is almost entirely dominated by pure ARM’s. The price of money matters far less than the ability to get approved for the loan, and we obviously had very easy credit due to reduced standards, independent of the rates.