Joe, it seems the local economists got it right. This article -
http://www.bostonherald.com/business/real_estate/view/20091229mortgage_rate_hike_feared_as_poison_to_home_sales/srvc=home&position=also
indicates there is an impending increase to as much as 8% on interest rates for 30 year fixed mortgages. The fear of this will likely pressure some to buy now but a fragile housing market will likely be crushed by this in the longer term. The economist I spoke to at SU predicts that if we continue the way we're going we can expect a robust recovery at the end of 2010 after which the economy will make a downturn. One caveat. He believes that if cap and trade is passed we won't see that robust recovery - just the downturn.
It seems that the potential for a false sense of economic security is a real possibility.
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isn't the normal trend of recovery exactly what you said? After past recessions, we usually have a recovery period immediately followed by a down turn followed by the real recovery period. In some cases, that downturn was a second reccession, such as the recessions of the 1980s in which case the second recession was actually worse than the first. Some studies have shown that the reason for this double correction is based on the fact that the govt and the fed did to much too quick and over compensated. It seems that the current growth we are seeing is extremely slow. Maybe this is a good thing. Maybe we need the extremely slow recovery in order to prevent the second downturn associated with most recoveries
ReplyDeleteAs for interest rate increases, doesn't this need to happen to minimize inflation? Obviously if it increases too quickly, there will be problems, but from my understanding, there is a delicate balance between inflation and interest rates. If rates are low for too long, in the long run, we will see higher inflation rates. If rates are increases to soon, it stifles the recovery.
In my opinion, one of the biggest problems right now is the bank reserve ratio. The banks are required to hold a certain percentage of deposits and they are alowed to loan out the rest. Normally, that number is 10-15%. Right now, that number is close to 90% which tells us that the banks are just sitting on the money through their own choosing, not the federal reserves. To put it in perspective, prior to the current recession, banks held a couple billion in reserves. Today, it's closer to a couple TRILLION in reserves. The banks just are not lending money which is resulting in very little capital purchases, and is also having a major impact on the housing market. Maybe with this interest rate increase, the banks will be more willing to lend which will inject much more money into the economy resulting in major GDP growth in which case the government spending can start to decrease because consumer spending will be on the rise.
One more thing to add... I can't help but wonder if the current recession is a self fullfilled prophecy. I mean before the impact of this recession really hit home for any of us, the word on the street was grim. We were told that we were heading for a recession. We were told that the banks were in trouble. With this, consumer confidence was destroyed and people in general stopped buying. With this, the banks became scared to lend and chose to sit on the money. When the banks sit on the money, they can't make a profit. Obviously if you are not making a profit you are not doing well. I can't help but wonder if the real reason that we are ina recession is for no other reason than because they told us we are in a recession and everybody acted appropriately. Isn't the defensive actions of preparation for recession enough to put our country into recession?
I am certainly no economist, but it is definitely an interesting field and I would love to hear somebody wiser tell me where I am wrong.
Thanks Joe!
Is this our big change? Gee Thanks.
ReplyDeleteI agree with a lot of what you say, Jason, but there still remains one question that no one can answer reasonably. How do we service and unserviceable debt? We HAVE been monetizing it and that cannot be sustained as it continues to drive the value of our dollar down. Seize all property and use it in lieu of money for the good of the order? Blend all governments together in order to re-distribute the debt? Americans won't stand for being sold out to a new world order. We simply cannot repay everything we've borrowed. What now?
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