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High Interest Rates Fix Everything

By someone else following x   2008 Nov 16, 10:02am 16,787 views   251 comments   watch   nsfw   quote     share    


moon

Perhaps the entire credit crunch could be fixed with very high interest rates. Currently, banks and other institutions have to compete with the suicidally low interest rates of the Fed and the Treasury bailout programs.

Say you're a bank and you know that a new mortgage loan has a 10% risk of default. Then you have to charge at least 10% to compensate for this risk before you can even begin to make a profit. But you can't charge 10%, because you're competing with the Fed's 2% rates, and the Fed is lending without regard to default risk. So you would be committing bank suicide to make loans in a market poisoned by the Fed's rates, knowing such loans will generate a large loss on average.

OK, the bank can get something from the defaulted loans by foreclosing and selling off the houses, but still, the point holds: the Fed is ruining the market for credit. It's kind of like American manufacturers being ruined by cheap Chinese imports, only it's American banks and savers being ruined from within our own country, by the Fed.

The directors of the Bank of England once bragged that a 10% interest rate could "draw gold from the moon". If it's credit we lack, let rates rise, and watch credit problems disappear.

Patrick

#housing

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212   Zephyr   ignore (0)   2008 Nov 19, 1:33pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

If you borrow, then you do not need to print. You are borrowing money that already exists.

The whole point of printing your way out of debt is that you don't have to borrow the money - you just print it. You can use your newly printed currency to directly pay off the debt.

This flood of currency diminishes or destroys the value of the money.

213   Zephyr   ignore (0)   2008 Nov 19, 1:40pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Alternatively you can use the printing press to fund the government. The amount printed will be equal to the amount spent by the government. If the government spends 20% of GDP and uses new money to fund this spending, then the value of each dollar will decline by 20%. Prices would rise by 25% (inflation of 25%).

214   thenuttyneutron   ignore (0)   2008 Nov 19, 1:56pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Paul,

I live about 80 miles from Detroit. How nervous do you think I am about the Big 3 workers suddenly not having an income? I don't want any bailouts, but I also am now getting nervous.

215   justme   ignore (0)   2008 Nov 19, 5:02pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Neutron,

Agreed. Potentially millions of people out of work is a recipe for unrest and violence.

216   FuzzyMath   ignore (0)   2008 Nov 19, 11:24pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

This is getting ugly. The bad news is turning into a cacophony.

So much for a slow flog into a depression. Welcome to the digital age, where we can go from paradise to hell in 3 short months.

217   FuzzyMath   ignore (0)   2008 Nov 19, 11:25pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Look for the PPT today.

218   Zephyr   ignore (0)   2008 Nov 20, 12:03am   ↑ like (0)   ↓ dislike (0)   quote   flag        

If there ever was a PPT they are bankrupt by now.

219   lunarpark   ignore (0)   2008 Nov 20, 2:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

http://www.dqnews.com/News/California/Bay-Area/RRBay081119.aspx

Bay Area median price tumbles to $375K; sales reach high for '08

220   FuzzyMath   ignore (0)   2008 Nov 20, 2:38am   ↑ like (0)   ↓ dislike (0)   quote   flag        

from that article...

"What happens next to housing will be determined by the fate of the economy, and especially the job market, as well as the outcome of recently announced efforts to curb foreclosures."

it's fucked for sure.

I think housing would be bottoming right now if they could have held the economy together. But then again, how do you hold the economy together when housing drops 40%?

The spiral is going to take this thing much farther than it should have. While I think it is worth cheering for a return for sound lending, reasonable prices, etc (good things), I still get the feeling that no one realizes how bad things are going to get.

221   OO   ignore (0)   2008 Nov 20, 3:24am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"At the county level, foreclosure resales ranged from 10.6 percent of resales in San Francisco to 68 percent in Solano County. In the Bay Area's other seven counties, October foreclosure resales were as follows: Alameda, 41.1 percent; Contra Costa, 58.9 percent; Marin, 17.2 percent; Napa, 45.6 percent; Santa Clara, 36.4 percent; San Mateo, 21.6 percent; Sonoma, 49.7 percent."

This is juicy.

222   Zephyr   ignore (0)   2008 Nov 20, 5:21am   ↑ like (0)   ↓ dislike (0)   quote   flag        

For a long time many people were hoping for and cheering for a price collapse in housing. But that does not happen without also getting severely unfavorable economic conditions.

Well those conditions came and the worst of it is now upon us. We are only in the beginning of the real pain.

It reminds of the old saying "Be careful what you wish for."

223   Peter P   ignore (0)   2008 Nov 20, 5:32am   ↑ like (0)   ↓ dislike (0)   quote   flag        

It reminds of the old saying “Be careful what you wish for.”

It is not like wishing it made it happen. Failing all else, we still have schadenfreude. ;-)

224   SP   ignore (0)   2008 Nov 20, 5:59am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Zephyr Says:
For a long time many people were hoping for and cheering for a price collapse in housing. But that does not happen without also getting severely unfavorable economic conditions.
...
It reminds of the old saying “Be careful what you wish for.”

Being careful about what we wish for does not change reality. I would bet that the permabulls (remember those?) who used to troll here are probably much worse off if they followed their own real-estate binge advice.

Be that as it may, readers here (and at other sites like Mish's) have been extremely well-served by the information and pointers that helped us prepare for this.

225   FuzzyMath   ignore (0)   2008 Nov 20, 6:04am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Man, thank God we saved the financial system. I mean, if we hadn't of done that, I'll bet equities would be down 50%, housing down another 10%, unemployment would skyrocket, and there would be economic chaos.

Oh wait.

226   FuzzyMath   ignore (0)   2008 Nov 20, 6:08am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"Be that as it may, readers here (and at other sites like Mish’s) have been extremely well-served by the information and pointers that helped us prepare for this."

I think that's right to some degree SP. But I remember even just a year ago a bunch of people on this forum saying things along the lines of... "look, so housing goes back down to 1999 levels... what's the big deal?".

Anyhow, I think the general populace has finally realized what patrick.netters knew 2 years ago. But talking to people I know, they have no idea what's coming their way in 6 months.

And even now, predicting hell in 6 months, I can't help but wonder if it might come even sooner.

227   Zephyr   ignore (0)   2008 Nov 20, 6:13am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I absolutely agree that wishing does not change reality. Hope is not a plan!

228   northernvirginiarenter   ignore (0)   2008 Nov 20, 6:15am   ↑ like (0)   ↓ dislike (0)   quote   flag        

GSE's just announced suspension of all foreclosures in cases of occupied homes until after the holidays.

229   Zephyr   ignore (0)   2008 Nov 20, 6:16am   ↑ like (0)   ↓ dislike (0)   quote   flag        

But my point about those hoping for a price crash is not that hoping brought it on. Only that those who were hoping for it did not realize how bad it would be for so many people other than property owners and speculators.

230   Peter P   ignore (0)   2008 Nov 20, 6:17am   ↑ like (0)   ↓ dislike (0)   quote   flag        

. Only that those who were hoping for it did not realize how bad it would be for so many people other than property owners and speculators.

We knew about the Mayan Calendar. We are mentally prepared. ;)

231   Zephyr   ignore (0)   2008 Nov 20, 6:20am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I would like to see things stabilize before the economy is severely impacted. So far the damage to the economy is just started - the damage is small compared to how bad it will likely become. Think in terms of unemployment and inflation in the double digits.

232   Zephyr   ignore (0)   2008 Nov 20, 6:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"Be that as it may, readers here (and at other sites like Mish’s) have been extremely well-served by the information and pointers that helped us prepare for this."

The way to prepare for this was to sell your real estate in 2006, and sell your stock in 2007.

233   Zephyr   ignore (0)   2008 Nov 20, 6:28am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"We knew about the Mayan Calendar. We are mentally prepared."

Me too. I plan to party until Dec 21, 2012. If I wake up in the morning on Dec 22, I will go back to work.

234   SP   ignore (0)   2008 Nov 20, 8:17am   ↑ like (0)   ↓ dislike (0)   quote   flag        

FuzzyMath Says:I remember even just a year ago a bunch of people on this forum saying things along the lines of… “look, so housing goes back down to 1999 levels… what’s the big deal?”.

I am sure I would have said that then, and will also say it now. Housing going "down" to 1999 levels is no big deal - in fact, that is part of the solution.

235   DennisN   ignore (1)   2008 Nov 20, 9:04am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The way to prepare for this was to sell your real estate in 2006, and sell your stock in 2007.

Hey at least I was right half of the time.

236   FuzzyMath   ignore (0)   2008 Nov 20, 9:23am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"in fact, that is part of the solution."

Yup. It might be the only part of the solution.

It is however, a big deal.

237   HeadSet   ignore (1)   2008 Nov 20, 10:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Look for the PPT today

Looks like the PPT took off work an hour early.

Supposedly the stocks plunged after the Dems balked on the auto bailout. The auto bailout (interesting pun auto bailout, like in automatic) will probrably just be delayed, so we may see a rally then.

238   EBGuy   ignore (0)   2008 Nov 20, 10:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Shrinkage at the Fed. Oh, and the bid to cover of the most recent TAF auction was slightly smaller than the one it replaced. I don't know how we live with that thing...

239   justme   ignore (0)   2008 Nov 20, 11:31am   ↑ like (0)   ↓ dislike (0)   quote   flag        

TOB,

C'mon, you can't be serious. Those egomaniac jackasses at Tesla who made a $100k electric car that ran on laptop batteries? Tesla is toast.

240   justme   ignore (0)   2008 Nov 20, 11:47am   ↑ like (0)   ↓ dislike (0)   quote   flag        

TOB, appreciate the sentiment. I often take your word on other topics :-).

241   PermaRenter   ignore (20)   2008 Nov 20, 12:11pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Now that crude oil is closing in on $50 a barrel and there seems to be no end in sight for home price declines, look for this to dip further into negative territory next month.

While there is nothing inherently different about a negative vs. positive inflation number, the fact is, at about -1.5% deflation, in the past markets and economies have started to behave very differently than with inflation. Think of it like a guy in a barrel above Niagara Falls. If he goes over the Canadian falls, he probably lives. If he goes over the American falls, he will absolutely die. At about -1.5% deflation, you reach the dividing point where in the past it has almost always meant the barrel is going over the American falls.

242   Zephyr   ignore (0)   2008 Nov 20, 12:43pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Deflation creates a different psychology, and it makes hoarding cash a profitable venture. This greatly reduces the incentive to loan money which hurts business.

Deflation also reduces the incentive to invest or engage in commerce. This leads to job destruction and more deflation...
.
.
.
.

243   PermaRenter   ignore (20)   2008 Nov 20, 1:00pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

OK, lets have deflation .....

244   SP   ignore (0)   2008 Nov 20, 2:00pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

# justme Says:
C’mon, you can’t be serious. Those egomaniac jackasses at Tesla who made a $100k electric car that ran on laptop batteries? Tesla is toast.

I know two idiots who have put deposits down on that. Still waiting for the car, and oy vey, these two were worse than RE-permabulls when it came to repeating the happy talk. They seem to have shut up now.

245   justme   ignore (0)   2008 Nov 21, 12:24am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Inquiring minds want to know -- Larry and Sergey? ;-)

246   justme   ignore (0)   2008 Nov 21, 12:47am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I wonder how badly Citibank/Citigroup really is doing....is Mr. Market correct about them?

247   Duke   ignore (0)   2008 Nov 21, 12:57am   ↑ like (0)   ↓ dislike (0)   quote   flag        

How much is Pleasanton going to be affected by 1600 lay-offs at WaMu?

248   Peter P   ignore (0)   2008 Nov 21, 2:02am   ↑ like (0)   ↓ dislike (0)   quote   flag        

How much is Pleasanton going to be affected by 1600 lay-offs at WaMu?

It is going to be unpleasant.

249   Peter P   ignore (0)   2008 Nov 21, 2:08am   ↑ like (0)   ↓ dislike (0)   quote   flag        

is Mr. Market correct about them?

Mr. Market is ALWAYS correct.

250   FuzzyMath   ignore (0)   2008 Nov 21, 2:40am   ↑ like (0)   ↓ dislike (0)   quote   flag        

William Black is my new hero.

He is the first I have seen to come out and clearly explain who the perpetrators are in this crisis, and why our government is not prosecuting them.

A MUST see.

http://finance.yahoo.com/tech-ticker/article/133224/Former-Regulator-Clear-Fraud-in-Financial-Crisis----Why-Isn%27t-Anyone-in-Jail?tickers=BAC,WM,CFC,XLF,JPM

(ignore the 2 yahoo douchebags)

251   SP   ignore (0)   2008 Nov 21, 7:57am   ↑ like (0)   ↓ dislike (0)   quote   flag        

justme Says:
Inquiring minds want to know — Larry and Sergey?

LOL, but no.

Two different idiots cow-orkers. One of them is still a little hopeful that Tesla will pull through.

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