5 ms·

I'm a little surprised that there hasn't been a populist rebellion over interest rates. Low rates have inflated pretty much every asset class. This is especia

I'm a little surprised that there hasn't been a populist rebellion over interest rates. Low rates have inflated pretty much every asset class. This is especially so in housing: The Fed needed to reinflate housing prices in order to make many systemically important players (banks, AIG) solvent again. I have to wonder though: In re-inflating house prices, have we just off-loaded the bad investment to non-systemic institutions? ie, avg people?

mwsherman 11y ago
Yes. It’s opposite of what one would do to make housing affordable. Unaffordable housing, especially in cities, is a huge and regressive drag on the economy.
- jseliger 11y ago
  Unaffordable housing, especially in cities, is a huge and regressive drag on the economy. Housing is unaffordable primarily due to parochial land-use restrictions, as Matt Yglesias explains in The Rent Is Too Damn High (http://www.amazon.com/TheRent-Too-Damn-High-Matters-ebook/dp/B0078XGJXO?ie=UTF8&tag=thstsst-20&linkCode=as2&camp=1789&creative=390957 http://www.amazon.com/TheRent-Too-Damn-High-Matters-ebook/dp...) and I explain here: http://jakeseliger.com/2015/09/24/do-millennials-have-a-future-in-seattle-do-millennials-have-a-future-in-any-superstar-cities/ http://jakeseliger.com/2015/09/24/do-millennials-have-a-futu.... If we want cheaper housing, all we have to do is legalizing the building of it.
  - switch007 11y ago
    Sorry, my eyes are tired so I didn't read your post, but there's a 3,000+ house development happening in my town — a HUGE development for the area — and the starting prices are $600,000, in a country where the average salary is $39,750 (the region's average is $43,000). There are similar developments of 100s of houses, which equally ridiculous prices. I only see the existing house prices going up, not down.
  - maxsilver 11y ago
    > If we want cheaper housing, all we have to do is legalizing the building of it. I wish it was that simple. But experience disproves this theory. It's like saying "if you want cheaper cars, build more Lamborghini's". For instance, the article you link to complains about Seattle being unaffordable. Which is ironic because Seattle is building apartments like crazy. Something like 8,000 new apartments opened last year, and another 11,000 new apartments are scheduled for this year. If "housing gets cheaper when you legalize building it", then why are the cities that are building new housing never becoming any cheaper? --- Even in my tiny midwest town, they're building tons of new urban-ish apartments. And the rent in those units is always $1,000 over the average for the area. It's sending the entire towns rents up (even for ancient, crummy buildings). Most people prefer urban areas. For every one new apartment built downtown, three new households decide they want to live there. You can't outbuild demand, because the act of building increases the demand. --- I'm not suggesting we stop building -- we need the housing, we should be building up. But it's clear to me that building new housing alone is not enough to help with affordability in any way.
    - epistasis 11y ago
      8,000 new apartments for Seattle is a drop in the pond, no wonder the rents are going up. It's building crazy little amount of housing! With a population of 650,000, even if Seattle were growing only at the rate of the US population of 0.7%, then they would need 4,500 new apartments. But they're growing much faster, like 2-3% per year, for quite some time. No wonder housing is getting pricy. They need to build 30,000 to 40,000 apartments per year for a while to relieve the shortage. Most of these new apartments will be more pricy, because they're new construction, but with time it will even out. >Even in my tiny midwest town, they're building tons of new urban-ish apartments. And the rent in those units is always $1,000 over the average for the area. It's sending the entire towns rents up (even for ancient, crummy buildings). I'm not sure the market works that way... These new apartments are more pricy presumably because they are more desirable; new construction usually is. In 30 years, they will be back with the rest of the rates. How do these new apartments increase the rent of the other apartments? Why can the land lords of the crummy apartments charge higher rents? Is it because there's not enough apartments or is it because they are behaving in anti-competitive ways? There may be some macroeconomic ways to get back to more affordable housing without building, but they all involve devaluing current housing in some way.
dragonwriter 11y ago
> I'm a little surprised that there hasn't been a populist rebellion over interest rates. Low interest rates are in immediate terms good for net debtors and bad for net creditors. In broad strokes, this makes them good for the poor and bad for the rich (they are usually responses to conditions for which the reverse is true -- or, at least, which are more bad for the poor than the rich, but I'm just considering the interest rates themselves.) So, a populist rebellion over (low) interest rates makes little sense. (A populist rebellion over the conditions that provoke low interest rates makes sense, and is, in fact, visible on both sides of the partisan political divide, split by what people see as the source of and solution to those conditions.)
- 300bps 11y ago
  Low interest rates are great for the rich. Wealthy people in general know how to effectively utilize capital to make more money and if that capital is cheaper then all the better for them. I mean cost of capital is one of the chief components of calculating the net present value of a prospective project so the lower the interest rate the more profitable various projects are.
  - rhino369 11y ago
    And other rich people are the one's loaning their money out for practically nothing. It's good for active investors (which is why it's done), but it's bad for less risky investments (bonds and other loans). And those investments carry greater risk, which is a big downside. If, for example, the unicorn bubble is real, all that cheap capital was a curse, not a benefit. For the last 8 years, it's been impossible to save money without big risk. Interest rates have been below inflation.
  - jandrese 11y ago
    Although to be fair, high interest rates are also great for the rich. It's good to be rich.
- esja 11y ago
  Populist anger is justified… low rates are a key driver of wealth inequality. 1. As interest rates approach zero, asset prices approach infinity (via "Discounted Cash Flow" valuation). The wealthy own most assets. 2. The wealthy tend to have a lot of debt (by choice). Low rates make this cheaper to deal with, and cheaper to obtain for speculation, lifestyle upgrades, etc. Point 1 above provides lots of equity to borrow against. This is the "wealth effect” which the Federal Reserve and other central banks have been deliberately pursuing. They thought reflating assets would make people feel better and spend more. Unfortunately the wealthy don't need ten haircuts a month or twenty meals a day. It also turns out that when normal people see houses becoming more expensive, they decide to save more. So the net effect has been negative. All very predictable but central banking is pre-scientific.
mathattack 11y ago
The flip side though is low rates make it easier to afford the home payments too. Your mortgage payments on a 30yr loan at 4% on a 300K house are approximately the same as 8% on a 200K house. (Not strictly proportional due to principal payments) One other thing to consider - it's real rates than matter, not nominal rates. 4% interest rate in a no-inflation environment is the same as 8% with 4% inflation.
- phkahler 11y ago
  >> The flip side though is low rates make it easier to afford the home payments too. Nope. When first time buyers go to the bank to get approved for a loan it goes like this: 1) Look at your income and expenses 2) Figure out what monthly payment you can afford 3) Work backward from #2 and the interest rate to determine how much you can borrow. From there every player (agents, sellers, bank) all want you to spend the full amount from #3 on your house. Since there is real crap at the bottom of the market, every $10k gets you a notable improvement. 2nd time buyers also fall for this, and it doesn't matter if you're smarter (like I was) and don't spend the full amount. Enough people let their loan approval amount influence them that the following holds: Your monthly payment is mostly based on your income. It's the price of housing that varies (inversely) with interest rates. By lowering rates over 30 years, they stimulated the economy until 2006-7. Then they jacked up the rates which initially lowered housing prices, which put people in trouble while also slowing the economy a bit and it all fell apart. They subsequently lowered rates and did QE1-3 to get things moving while also reinflating the housing bubble. They now have to raise rates ever so slowly to avoid part II, but they must raise them in order to restore the ability to regulate inflation with them. https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:FedfundsCAP.png https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File...
  - mathattack 11y ago
    I think you're missing my point... If rates go up, it doesn't help me that much as a buyer, because I can afford less house.
akhatri_aus 11y ago
The real interest rate is positive. If interest was low and the prices of commodities and their processed product increased there would be a motive for a rebellion. A $100 bill, with interest, buys alot of stuff these days compared with 10 years ago.
nugget 11y ago
Bernie Sanders, a proud socialist and outspoken advocate of wealth redistribution, just pulled even with Hillary Clinton for the Democratic nomination for President. In the Iowa and New Hampshire primaries, voters under the age of 30 broke for Sanders by 70% (compared to 57% for Obama in 2008). Meanwhile Donald Trump, who has the most liberal social record of all the GOP candidates, and who continually insults the GOP establishment, is 20 points ahead of the rest of the field. For us fans of politics, this is like witnessing two black swans simultaneously emerge within one pond and begin loudly mating. Your populist rebellion may be here.
- meddlepal 11y ago
  Wait and see on Bernie. NH democrats might as well be from Vermont and I don't think there is any doubt Bernie will eat VT's primary when it comes up.
  - kmonsen 11y ago
    He will probably not win, but he is doing much better than anyone expected. Same with Trump (except he has an outside chance at winning this year).
    - yardie 11y ago
      They said the same of a certain junior senator from Illinois. Why do people think Sanders can't win when all evidence points to the contrary. Sanders is sticking to the core liberals. That solid 25-35% that will actually vote. Hillary is trying to pursue centre, swing voters and losing the liberal core. Trump is doing the same on the right. Hillary and Jeb assumed they had the left and right core voters, respectively, locked up and both have been proven completely wrong.
      - jandrese 11y ago
        Sanders can't seem to connect with Black and Latino voters, and if you can't do that you aren't going to win a Democratic primary. Minorities love Hillary, for reasons that are not entirely clear to me. Also, Bernie supporters skew very young, and young people are relatively bad at making to their polling places, especially in primary races. He has basically no chance of taking Nevada for example, and will probably be down by tens of points. If the election is close at all there it will be a major win for him. Also, the establishment Democrats see him as George McGovern 2.0 and are terrified of giving Donald Trump a 49 state sweep.

mwsherman 11y ago

Yes. It’s opposite of what one would do to make housing affordable. Unaffordable housing, especially in cities, is a huge and regressive drag on the economy.

jseliger 11y ago
Unaffordable housing, especially in cities, is a huge and regressive drag on the economy. Housing is unaffordable primarily due to parochial land-use restrictions, as Matt Yglesias explains in The Rent Is Too Damn High (http://www.amazon.com/TheRent-Too-Damn-High-Matters-ebook/dp/B0078XGJXO?ie=UTF8&tag=thstsst-20&linkCode=as2&camp=1789&creative=390957 http://www.amazon.com/TheRent-Too-Damn-High-Matters-ebook/dp...) and I explain here: http://jakeseliger.com/2015/09/24/do-millennials-have-a-future-in-seattle-do-millennials-have-a-future-in-any-superstar-cities/ http://jakeseliger.com/2015/09/24/do-millennials-have-a-futu.... If we want cheaper housing, all we have to do is legalizing the building of it.
- switch007 11y ago
  Sorry, my eyes are tired so I didn't read your post, but there's a 3,000+ house development happening in my town — a HUGE development for the area — and the starting prices are $600,000, in a country where the average salary is $39,750 (the region's average is $43,000). There are similar developments of 100s of houses, which equally ridiculous prices. I only see the existing house prices going up, not down.
- maxsilver 11y ago
  > If we want cheaper housing, all we have to do is legalizing the building of it. I wish it was that simple. But experience disproves this theory. It's like saying "if you want cheaper cars, build more Lamborghini's". For instance, the article you link to complains about Seattle being unaffordable. Which is ironic because Seattle is building apartments like crazy. Something like 8,000 new apartments opened last year, and another 11,000 new apartments are scheduled for this year. If "housing gets cheaper when you legalize building it", then why are the cities that are building new housing never becoming any cheaper? --- Even in my tiny midwest town, they're building tons of new urban-ish apartments. And the rent in those units is always $1,000 over the average for the area. It's sending the entire towns rents up (even for ancient, crummy buildings). Most people prefer urban areas. For every one new apartment built downtown, three new households decide they want to live there. You can't outbuild demand, because the act of building increases the demand. --- I'm not suggesting we stop building -- we need the housing, we should be building up. But it's clear to me that building new housing alone is not enough to help with affordability in any way.
  - epistasis 11y ago
    8,000 new apartments for Seattle is a drop in the pond, no wonder the rents are going up. It's building crazy little amount of housing! With a population of 650,000, even if Seattle were growing only at the rate of the US population of 0.7%, then they would need 4,500 new apartments. But they're growing much faster, like 2-3% per year, for quite some time. No wonder housing is getting pricy. They need to build 30,000 to 40,000 apartments per year for a while to relieve the shortage. Most of these new apartments will be more pricy, because they're new construction, but with time it will even out. >Even in my tiny midwest town, they're building tons of new urban-ish apartments. And the rent in those units is always $1,000 over the average for the area. It's sending the entire towns rents up (even for ancient, crummy buildings). I'm not sure the market works that way... These new apartments are more pricy presumably because they are more desirable; new construction usually is. In 30 years, they will be back with the rest of the rates. How do these new apartments increase the rent of the other apartments? Why can the land lords of the crummy apartments charge higher rents? Is it because there's not enough apartments or is it because they are behaving in anti-competitive ways? There may be some macroeconomic ways to get back to more affordable housing without building, but they all involve devaluing current housing in some way.

dragonwriter 11y ago

> I'm a little surprised that there hasn't been a populist rebellion over interest rates. Low interest rates are in immediate terms good for net debtors and bad for net creditors. In broad strokes, this makes them good for the poor and bad for the rich (they are usually responses to conditions for which the reverse is true -- or, at least, which are more bad for the poor than the rich, but I'm just considering the interest rates themselves.) So, a populist rebellion over (low) interest rates makes little sense. (A populist rebellion over the conditions that provoke low interest rates makes sense, and is, in fact, visible on both sides of the partisan political divide, split by what people see as the source of and solution to those conditions.)

300bps 11y ago
Low interest rates are great for the rich. Wealthy people in general know how to effectively utilize capital to make more money and if that capital is cheaper then all the better for them. I mean cost of capital is one of the chief components of calculating the net present value of a prospective project so the lower the interest rate the more profitable various projects are.
- rhino369 11y ago
  And other rich people are the one's loaning their money out for practically nothing. It's good for active investors (which is why it's done), but it's bad for less risky investments (bonds and other loans). And those investments carry greater risk, which is a big downside. If, for example, the unicorn bubble is real, all that cheap capital was a curse, not a benefit. For the last 8 years, it's been impossible to save money without big risk. Interest rates have been below inflation.
- jandrese 11y ago
  Although to be fair, high interest rates are also great for the rich. It's good to be rich.
esja 11y ago
Populist anger is justified… low rates are a key driver of wealth inequality. 1. As interest rates approach zero, asset prices approach infinity (via "Discounted Cash Flow" valuation). The wealthy own most assets. 2. The wealthy tend to have a lot of debt (by choice). Low rates make this cheaper to deal with, and cheaper to obtain for speculation, lifestyle upgrades, etc. Point 1 above provides lots of equity to borrow against. This is the "wealth effect” which the Federal Reserve and other central banks have been deliberately pursuing. They thought reflating assets would make people feel better and spend more. Unfortunately the wealthy don't need ten haircuts a month or twenty meals a day. It also turns out that when normal people see houses becoming more expensive, they decide to save more. So the net effect has been negative. All very predictable but central banking is pre-scientific.

mathattack 11y ago

The flip side though is low rates make it easier to afford the home payments too. Your mortgage payments on a 30yr loan at 4% on a 300K house are approximately the same as 8% on a 200K house. (Not strictly proportional due to principal payments) One other thing to consider - it's real rates than matter, not nominal rates. 4% interest rate in a no-inflation environment is the same as 8% with 4% inflation.

phkahler 11y ago
>> The flip side though is low rates make it easier to afford the home payments too. Nope. When first time buyers go to the bank to get approved for a loan it goes like this: 1) Look at your income and expenses 2) Figure out what monthly payment you can afford 3) Work backward from #2 and the interest rate to determine how much you can borrow. From there every player (agents, sellers, bank) all want you to spend the full amount from #3 on your house. Since there is real crap at the bottom of the market, every $10k gets you a notable improvement. 2nd time buyers also fall for this, and it doesn't matter if you're smarter (like I was) and don't spend the full amount. Enough people let their loan approval amount influence them that the following holds: Your monthly payment is mostly based on your income. It's the price of housing that varies (inversely) with interest rates. By lowering rates over 30 years, they stimulated the economy until 2006-7. Then they jacked up the rates which initially lowered housing prices, which put people in trouble while also slowing the economy a bit and it all fell apart. They subsequently lowered rates and did QE1-3 to get things moving while also reinflating the housing bubble. They now have to raise rates ever so slowly to avoid part II, but they must raise them in order to restore the ability to regulate inflation with them. https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:FedfundsCAP.png https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File...
- mathattack 11y ago
  I think you're missing my point... If rates go up, it doesn't help me that much as a buyer, because I can afford less house.

akhatri_aus 11y ago

The real interest rate is positive. If interest was low and the prices of commodities and their processed product increased there would be a motive for a rebellion. A $100 bill, with interest, buys alot of stuff these days compared with 10 years ago.

nugget 11y ago

Bernie Sanders, a proud socialist and outspoken advocate of wealth redistribution, just pulled even with Hillary Clinton for the Democratic nomination for President. In the Iowa and New Hampshire primaries, voters under the age of 30 broke for Sanders by 70% (compared to 57% for Obama in 2008). Meanwhile Donald Trump, who has the most liberal social record of all the GOP candidates, and who continually insults the GOP establishment, is 20 points ahead of the rest of the field. For us fans of politics, this is like witnessing two black swans simultaneously emerge within one pond and begin loudly mating. Your populist rebellion may be here.

meddlepal 11y ago
Wait and see on Bernie. NH democrats might as well be from Vermont and I don't think there is any doubt Bernie will eat VT's primary when it comes up.
- kmonsen 11y ago
  He will probably not win, but he is doing much better than anyone expected. Same with Trump (except he has an outside chance at winning this year).
  - yardie 11y ago
    They said the same of a certain junior senator from Illinois. Why do people think Sanders can't win when all evidence points to the contrary. Sanders is sticking to the core liberals. That solid 25-35% that will actually vote. Hillary is trying to pursue centre, swing voters and losing the liberal core. Trump is doing the same on the right. Hillary and Jeb assumed they had the left and right core voters, respectively, locked up and both have been proven completely wrong.
    - jandrese 11y ago
      Sanders can't seem to connect with Black and Latino voters, and if you can't do that you aren't going to win a Democratic primary. Minorities love Hillary, for reasons that are not entirely clear to me. Also, Bernie supporters skew very young, and young people are relatively bad at making to their polling places, especially in primary races. He has basically no chance of taking Nevada for example, and will probably be down by tens of points. If the election is close at all there it will be a major win for him. Also, the establishment Democrats see him as George McGovern 2.0 and are terrified of giving Donald Trump a 49 state sweep.