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

To: wonk who wrote (55762)	3/24/2008 8:14:01 AM
From: wonk	Respond to of 542836

...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. Oops, should have said 5 and 50. My bad....

To: wonk who wrote (55762)	3/24/2008 11:12:39 AM
From: neolib	Respond to of 542836

You are focusing on the things which determine the price of credit. I'm focusing on the effect of low credit prices. These are two different things AFAIK. It is indeed true that low FED rates do not necessarily translate into low rates for all those who would borrow. In fact we are somewhat seeing that now, with the FED lowering rates, but banks not following in lockstep, as credit spreads widen. Other factors do contribute to determining the price of credit as you note. What I think is true however is that low credit prices, result in asset inflation. And this is true even if the low credit is only available with high standards. The significant difference is that the latter will tend to concentrate asset accumulation in the hands of a smaller pool of people. Take things a bit to the extreme. Imagine that interest has been about 10% for real estate for everybody (ala 1980's rates) for long enough that any change transients have damped out (decade or more), but suddenly changes to near 0% for 10% of the population, while remaining at 10% for 90% of the population. What do you think will happen in the real estate market as this transient event unfolds for say 5-10 years? Compare to interest rates dropping to 5% for everyone instead. I'm not searching for accurate numerical results, (the numbers are out of thin air) rather qualitative estimates of what would happen to price and ownership.