Where’d the money come from?
What was its effect on the economy?
(detailed version) Millions of Americans essentially found sacks of gold in their basement over the past year or two, as they were able to free up money by refinancing their houses at lower interest rates. Where did all this money come from?
A short answer, of course, is “the Fed lowered the overnight rate, which caused other interest rates to drop, and…” which is fine so far as it goes, but that just turns the question into, “Is there a cost associated with the Fed’s lowering the interest rate, or was it a free lunch? And if there’s a cost, what is it, and where/how does it show up?”
The other part of the question, of course, is: “To what extent did the Fed make interest rates go down all by itself, and to what extent were other economic forces pushing them down anyway, and what were those forces?”
- (detailed version) (a) How much money was added to the economy by the refi boom, and (b) what should the short/medium/long term effects of this have been?
IOW, according to conventional models, (b) should most of the stimulative effect of the refinancings of 2002 and 2003 have already been felt, or should we expect consumers to have only begun to spend as a result of those refinancings?
Help me out here, folks. I know we’ve got to have some folks around here who know their economics the way Orbifold knows his math.
I’m not the guru on this, but I have a somewhat well-read opinion.
The liquidity to all markets that has been provided by Fed policy in the last year or two is simply staggering. There is so much money out there, you’d better be afraid.
They have simply increased the money supply to keep the economy from tanking. Someday, you have to start reeling it back in, hopefully in a period of good employment, creation of jobs, exports increasing, all the good stuff. Only thing, —it hasn’t happend yet.
My opinion is that consumers have spent their refi money. They used it to keep afloat.
I know that more economically conservative poster may not agree, but I think we’ll have to pay someday. It’s only a matter of when.
I agree with the above poster about the condition of the economy, but thats another topic.
You asked where the money came from? A simple and short answer is that it came from your grandmother. Remember those 10% CDs and Tbills that she USED to have. By lowering interest rates to insane levels the governement makes it almost pointless to save money. Therefore you must spend it and in doing so stimulate the economy and create jobs. Many people with extra money have chosen to spend this money on McMansions rather than save it for a crappy 1% interest. Or put it in the stock market hoping for a better return.
Not unless your grandma is Alan Greenspan!.
The Fed has single handedly caused much money to be printed and put into the system to keep things moving. Your grandmother, bless her soul, has only a few per cent more in the principal department than she had three years ago.
The economy is awash in bucks created by the Fed in the last 2-3 years.
It’s not nice to dis your granny!
OK, but neither of you has answered an essential part of my question: is there a cost to this, or is all this extra money we’re awash in, ‘free’ money?
Used to be, if the gummint just created a bunch of extra money, it would cause inflation: more money backed by the same real wealth logically makes every dollar in circulation worth less.
OK, the dollar has been plummeting relative to other major currencies such as the euro. Is there a cause and effect here, or is this coincidental? But domestically, at least, inflation’s not been even remotely a threat.
There will be a cost. It just isn’t there yet.
Housing prices across the nation have risen dramatically in the last 1-3 years. It’s all been done on the back of low interest rates and increases in the money supply.
But how long can it last? Some day, these fantastic home prices will have to be vetted by additional buyers willing to pay the same or higher prices. But where will you get a never-ending supply of home buyers at higher prices? You can only get that if you have households with ever-increasing incomes. And it ain’t happening.
It’s a bubble. Just a matter of how long before it breaks.