10 ms·

Well, the classic model of how this should work is: 1) Economy sags, people have little demand to borrow money for investment 2) Interest rates are lowered to

Well, the classic model of how this should work is: 1) Economy sags, people have little demand to borrow money for investment 2) Interest rates are lowered to spur investment 3) Investment takes place, economy recovers 4) People are much hungrier to borrow money for investment, so interest rates increase We haven't reached (4), and in addition, it should seem surprising that borrowing money to put it into real estate will help the economy to recover. Unlike investments into production, an investment into land doesn't seem to actually affect supply and demand in a way that will help the economy grow.

fineline 9y ago
With debt to GDP ratios at all time highs around the world we do seem to have reached (4). But money markets aren't free markets, being effectively controlled - and distorted - by central banks. They hold interest rates low to attempt to spur investment in productive capacity. But business investments are motivated not only by interest rates (and labor market "flexibility") but by perceived demand, which, in part due to aforementioned low wage growth, stays weak. Capital and debt flows instead to bidding up asset prices.
- candiodari 9y ago
  And in case anyone asks, the fact that lending free money to banks and companies just causes that money to be paid out to the very rich is just a totally unrelated coincidence. Completely unrelated.
jpmattia 9y ago
> it should seem surprising that borrowing money to put it into real estate will help the economy to recover Usually that's right. Since there were a ton of MBS (and CDO's etc) based on real estate, there was a lot of incentive for money to flow to individuals and reverse the crash. Now that the banks have delevered, a crash in real estate would not be the systemic event it was in 2008. Of course, the bagholders would be those holding the assets.

fineline 9y ago

With debt to GDP ratios at all time highs around the world we do seem to have reached (4). But money markets aren't free markets, being effectively controlled - and distorted - by central banks. They hold interest rates low to attempt to spur investment in productive capacity. But business investments are motivated not only by interest rates (and labor market "flexibility") but by perceived demand, which, in part due to aforementioned low wage growth, stays weak. Capital and debt flows instead to bidding up asset prices.

candiodari 9y ago
And in case anyone asks, the fact that lending free money to banks and companies just causes that money to be paid out to the very rich is just a totally unrelated coincidence. Completely unrelated.

jpmattia 9y ago

> it should seem surprising that borrowing money to put it into real estate will help the economy to recover Usually that's right. Since there were a ton of MBS (and CDO's etc) based on real estate, there was a lot of incentive for money to flow to individuals and reverse the crash. Now that the banks have delevered, a crash in real estate would not be the systemic event it was in 2008. Of course, the bagholders would be those holding the assets.