Friday, January 29, 2010

The effects of easy money on mortgage lending

Simon Constable of Dow Jones Newswires points out the harmful side-effects of easy money on mortgage lending:
When Bernanke says low interest rates weren't the cause of the housing bubble, he is at best being disingenuous. Instead, he points to lax lending standards as the key fuel for inflating home prices.

But the truth is rather different.

His assertion is similar to claiming that it isn't the fall from a skyscraper that breaks your bones, but the sharp stop when your body reaches the street.

Low interest rates and lax lending standards are also closely related. They are just two symptoms of loose money. Lax lending standards were the response to healthy banks being awash with cash and most creditworthy borrowers already fat with debt.

So to put more money to work, bankers lent to increasingly dodgy borrowers. Indeed, that is what you would expect during a period of loose monetary policy.
Actually, Bernanke's position is that the loose money was coming from a global savings glut, a position I agree with. The effect on lending would be the same, though. My complaint is that the Fed's low interest rates exacerbated the problem when the Fed should have been trying to counteract the problem.

By the way, Bernanke's reappointment has been confirmed by the senate.


  1. "Actually, Bernanke's position is that the loose money was coming from a global savings glut, a position I agree with."

    Given the rise in debt to somewhere in the region of $13T can you offer some explanation or rationale behind the above statement? How can you have a savings glut coincident with unprecedented debt?

  2. "How can you have a savings glut coincident with unprecedented debt?"

    Because its a GLOBAL savings glut, not an American one.

    A close to home example for me, would to simply look at my Japanese wife's brother, who has over $250K saved in just a regular Japanese savings account.

    However my American brother has a $40K car he is paying on, $30K in credit card debt and is still paying back his $25K student loan, yet I don't think he has a single dime in the bank. He is always coming to my wife and I asking to borrow money for various bills he is behind on.

  3. Diplodocus Rex said...
    "How can you have a savings glut coincident with unprecedented debt?"

    For every dollar borrowed, there must be a dollar lent. The lending comes from savings. China is said to be the main source of excess global savings.

    Normally, if there was a big increase in the number of people who want to borrow, the significant demand for borrowed money would push interest rates up high. However, if the supply of savings exceeds the demand for borrowing, the interest rate will fall.

  4. I wonder what it must feel like owning a property right now realizing that you overpaid. I know how I get when I overpay for a lousy $100 purchase. I could only imagine what it's like knowing you overpaid 20k or 50k or how about 100k????? Ouch!

  5. "I wonder what it must feel like owning a property right now realizing that you overpaid."

    They dont. Everyone thinks their street is different. A lot of people are in denial.

  6. Blogger James said...
    "The lending comes from savings."

    Hmmm. I'm no economist and I'm a bit new to this game but my understanding is that lending is created out of thin air. Modern Lending in a debt-based, fiat, fractional reserve banking system is not predicated on savings (or capital). The commercial banks just pretend to make you a loan. They judge the risk and keep a little on reserve. Mish makes the case that the fractional part of the FSB system doesn't actually exist and Steve Keen backs that up by demolishing the money multiplier theory.

    I know I'm mixing a lot of different principles there but I'm keen to get my head around all of this. Any corrections welcome.

    wv mingies
    The plural of minge?

  7. While it is true that asset bubbles become inflated because of easy money, I think people have been too quick to blame the fed. Adjusting monetary supply and manipulating interest rates are pretty brunt instruments. The fed had very little control over the incentives promoting promote home ownership (tax incentives, the creation of fannie and freddie, lax regulating with respect to home lending [NINJA loans], advances in securitization).

  8. Dear Site Owner,

    I would like to say that your site ( is well-written and it contains lots of useful and up-to-date information. We really got interested in your web resource and we would like to cooperate with you. My websites are devoted on various financial themes and the have got amazing traffic and Google Values.

    My sites contains loads of useful financial information presented in news and articles that highlight the most much-talked-of issues such as credit cards, debt solutions, financial crisis, ways out of it, and many more. We believe this information can awake interest in your readers and can help you gain more and more traffics well. We would like to do some link exchange with your sites. If you agree then please let me know as per your convenience:

    Thanks! We look forward to working with you.

    Warm Regards,
    Dorothy Parker

  9. wow, there's a lot of spam here.

    Here's some content. In about 2 weeks, Immundria will release their report on the 2009 prices. They call it 2010 but it's really a distillation on 2009 actuals which feed their assessments. That in turns drives Immundria's tax revenues going forward.

    The easy to follow summary will be a map which should be linked from Immundria's Real Estate Assessment page. The map is the link on the left labeled Property Assessment Change Map.

    I'll post when the 2010 map is available but it's worth reviewing past maps if you're not familiar with Immundria.

  10. Ajax - whats your call in Immundria 3-5% down? A pittance given that we will still be up 90-95% over year 2000 prices.

    I only thank god that I ignored the people who told me not to buy in 2002. Had I listened, I would have missed out on hundreds of thousands of dollars that has been "locked in" forever.

    I do feel bad though for those who have to purchase now. Its just so expensive. I dont know how, but they clearly can afford it - sales are going as good as they have in years.

  11. Anonymous,

    I am not sure. Late 2009 sales prices are up and the backlog in my area of Immundria is down.

    I'll weasel out and call it basically flat on the Northwest part, perhaps lower in Old Town. A few zip codes will be up.

    But yeah. I hear you. In the 2001-2004 timeframe, well meaning friends told me that I was nuts for keeping my place. "Get out! Get out! Sell now and rent, you'll thank us later."

    My place, like yours is way up. I'm glad I didn't listen to them. I don't rub it in though and we are still friends.

    That said, I do not expect big price increases. Which is fine. It's a nice place to live and a short commute to work. Del Ray has good restaurants. I like the large trees on Russell Road.

  12. AJAX said...
    "wow, there's a lot of spam here."

    Yeah, the spammers have been coming on pretty strong over the past couple of weeks. I've had to lock down the comments so readers can only comment on posts posted with the last three days.