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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: neolib who wrote (55659)	3/23/2008 3:40:14 PM
From: Mary Cluney	Read Replies (1) \| Respond to of 542821

<<<It seems to be based on some ideological nonsense that markets are the only way to price things, so the FED can never say there is a bubble until after it implodes, at which point the FED views it as their duty to intervene and help clean up the mess. Very strange if you ask me.>>> It seems so clear. There has to be regulation, but too much regulation is also not healthy. Extremism does not work.

To: neolib who wrote (55659)	3/24/2008 7:42:59 AM
From: wonk	Read Replies (2) \| Respond to of 542821

…I agree with your comments wrt to why the financial system is imploding (decoupling of loan quality from lenders), but low interest rates are still a prescription for asset inflation, which in itself can lead to problems. It is a matter of attribution, which I keep commenting on, is very difficult to achieve (with any meaningful consensus) in economics. If you drive down interest rates low enough, you can still drive up speculation even with a reduced pool of investors based on tighter credit standards. This will result in asset inflation just as effectively as having a larger pool of investors with lower credit standards at a higher interest rate. Well this discussion has been rapidly passed by, but again I disagree. Loan standards, the 4Cs, principally determine whether credit will be granted. The interest rate, however, is generally influenced by the use of proceeds and the risk profile of the use of proceeds. These are not linear functions but recursive exercises. If the rate on the 30 year bond is 4% and I’m borrowing 30% loan to value, my mortgage shouldn’t cost me oh say more that 6% on a 30 year fixed. That 2% is all the risk premium is worth. If the 30 year bond goes to 12%, maybe my risk premium goes to 5% for a total rate of 17%. The increase in the risk premium is entirely due to the fact that all things being equal, my Capacity to service the debt is less sure. Between 4% and 12% long bond, the risk premium does not go up linearly: illustratively, perhaps 50 basis points between a Rf rate of 4 and 5 versus 500 basis points between 11 and 12. (again just an example and not meant to represent historical averages). So yes, I suppose I will agree that low rates can influence some asset inflation, but if you look at risk premiums, the effect is minor and mild as you move down the yield curve. To the extent that visibility and sunshine can substitute for less stringent regulation, I’m all for it. But the playing field has to be level and fair. What the credit card companies do today, for example, arbitrarily changing rates and terms, falls within the classical definition of felonious loan sharking.