Economics Questions

Re: Argument re Fed's ability to lower int rates

Zlatko — Sun, 18 Nov 2012 19:46:38 GMT

Interesting question. I don't know the answer but it has certainly spurred me on to figuring out more about how exactly the fed lowers interest rates. I haven't found much yet but the picture I have of the process so far is that the fed doesn't control interest rates directly at all, short term or long term. It merely increases the money supply thus driving the rates down.

I don't really see why an increase in the money supply wouldn't lower all rates. Is the argument that the fed only expands short-term credit? Maybe it's through the money multiplier, since when the money gets to bank #2 they don't know if it's from a short or long-term loan so they can lend it out for whatever duration they like? *shrugs*

Re: Argument re Fed's ability to lower int rates

Jon Irenicus — Sun, 18 Nov 2012 10:59:17 GMT

The interest rates alone certainly did not ensure a bubble in the housing market. They did, however, ensure a bubble somewhere. Just like the FED cannot now redirect the money back into housing, despite its best efforts.

Yes but he seems to be arguing that the Fed cannot lower long-term interest rates, which seems to nonsense. I just want to know why.

Re: Argument re Fed's ability to lower int rates

Aristophanes — Sat, 17 Nov 2012 21:17:11 GMT

The Community Reinvestment Amendments: Congress passed refulations in the early 90's (part of an amendment to the CRA) that forced mortgage lending institutions to have at least 55% of their mortgage loans in the subprime market. The Fed, Fannie/Freddie and the FHA all helped this become a reality. From there, I think, Peter Schiff is correct.

Re: Argument re Fed's ability to lower int rates

Prime — Sat, 17 Nov 2012 20:51:13 GMT

The interest rates alone certainly did not ensure a bubble in the housing market. They did, however, ensure a bubble somewhere. Just like the FED cannot now redirect the money back into housing, despite its best efforts.

I would think a whole host of other factors drove the liquidity into the housing market: Fannie and Freddy, the FHA, other legislation, etc... A secondary market is why the primary lenders didn't give a rip about lending standards. Why would Bank of America care who they made a loan to of they were simply going to dump the loan on Fannie in 3 months?

Argument re Fed's ability to lower int rates

Jon Irenicus — Sat, 17 Nov 2012 20:22:46 GMT

Can anyone take a look at this (Red Herring #13) and see what they think? I've seen this reproduced before, and dealt with on Mises.org on one of the articles, but I forget the reasoning used and which it was. I was looking for something showing the breakdown of govt- vs WS-backed debt but noticed that. Seems like a standard conservative tract.

I suspect that the root of it lies in the fact that the Fed also subsidises long term bond yields, anyway.