Comments on: Interesting?

By: Y'81

Y'81 — Tue, 11 May 2004 22:08:21 +0000

What is the evidence for your claim that annualized 90-day rates must over time be the same as the 10-year rate? I believe that, since the yield curve is generally positively sloped, short-term rates will be lower than long-term on average over any period you choose. As to the claim that speculators can make “as much money as they choose” by borrowing short and lending long, I would say, “only if they have an infinite liquidity facility to draw.”

By: wcw

wcw — Tue, 11 May 2004 21:54:32 +0000

Yes, mortgages can be trasferred. The process is so common in the US that even after twenty years of declining rates, everyone still knows what you mean when you “assume” a mortgage. First Google hit on “assume a mortgage” is http://www.ehow.com/how_7228_mortgage.html However, while rising rates do not make US homeowners stay put, falling property values can dry up the market. Many people seem unwilling to ‘take the loss’ when the true value of their property drops. I observed both situation growing up in California. During the ‘70s, as rates climbed ever-higher but property values did, too, the market was highly liquid. During the early nineties, in the brief respite between the ‘80s boom and the late-’90s one, prices troughed and settled—and turnover dropped.

By: John Quiggin

John Quiggin — Tue, 11 May 2004 21:20:44 +0000

wcw – could you explain your argument a bit further? Are you saying that the mortgage can be transferred with the house? If not, the asset is lost at the moment of sale, which is my point. mproust (1) I would define long-run budget balance as a situation where the debt-GDP ratio is constant. (2) I like it! And high interest rates are good for the Ford and GM pension arms (3) the main concern is that indebtedness is greater now than 94.

By: mproust

mproust — Tue, 11 May 2004 16:22:56 +0000

1) Why do deficits need to be balanced in the long run to avoid explosive growth? You seem to be saying that a situation in which public debt is a constant proportion of GDP, or of total private sector assets, that this situation is unstable. Do you really mean this? 2) I thought Ford and GM were social welfare agencies, in particular pension funds and health care organizations, with mfg arms. 3) What exactly happened when rates rose in 1994? I’ve heard reference to this a lot in the last couple of months. At the time I was part of a 2 career family with 2 small kids (in contrast to now where the situation has changed since my kids are now teenagers), so I was paying little attention to such things.

By: wcw

wcw — Tue, 11 May 2004 15:47:39 +0000

A couple notes. One, tighten up the writing. The fewer words you use to put across a piece like this, the better. Two, there is a lot of good analysis about mortgage rates, including the initial burst of refinancing one commenter noted in Seattle, and eventual ‘burnout’ as rates keep rising. This subject is sufficiently hoary to have made it into textbooks. Three, your statement that ‘homeowners would be forced to stay put, since moving would entail taking on a new mortgage at a much higher rate’ makes absolutely no sense. A mortgage holder at a low rate implicitly makes money as rates go up; he can sell his asset by negotiating to exchange it with the prospective buyer in return for some agreed-upon premium—as indeed was quite common way back in the late seventies, the last long rising-rate environment I remember. Gotta run—I’ll check back to see if you update this piece.

By: P O'Neill

P O'Neill — Tue, 11 May 2004 15:22:29 +0000

I was expecting you to reinforce your policy recommendation at the end of the post—which I assume is to raise short-term rates sooner rather than later. Since many of these asset market distortions flow from a gap between short & long, and we all seem agreed that long rates are headed upwards, then it should be close the gap ASAP, right? One problem though is that the 1994 experience shows how ugly this process of raising short rates can be, even if the final outcome is OK.

By: Walt Pohl

Walt Pohl — Tue, 11 May 2004 15:01:17 +0000

Mortgage rates are already going up, which is having the paradoxical effect (here in Seattle) of increasing the amount of refinancing and driving up housing prices. Everyone who was thinking about refinancing or buying a house is expecting interest rates to keep going up, so they’re trying to lock in the lowest rates they can.

By: Elaine Supkis

Elaine Supkis — Tue, 11 May 2004 14:10:44 +0000

We all know what is going to happen next. It is painfully obvious. If zero interest or 1% interest was good despite inflation, we would have seen this forever and forever. Why did rates rise so fast in the seventies? Obviously. Inflation thanks to…oil.

By: arb

arb — Tue, 11 May 2004 12:48:23 +0000

From one of the linked articles: “This securitisation is sound only if the credit rating agencies have got their risk assessments right, which in turn requires that the accounts on which those assessments are based should be valid. ” Sometimes the securitisation is made specifically because the rating agencies haven’t got their assessments right, since the securitisation is in fact an attempt to arbitrate the ratings. For instance, if you know a deficiency in the ratings systems, you can construct a security (e.g. a basket of junk bonds) which will be rated better than it should be – e.g. because the ratings agencies are bad at judging default correlations – and therefore you are able to sell it to investors at a higher rate.