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Lowering interest rates makes capital cheaper, which does spur investment and thus economic development, so, it can certainly have that effect given the right c

by adamhp 5y ago

Lowering interest rates makes capital cheaper, which does spur investment and thus economic development, so, it can certainly have that effect given the right circumstances. But keep it too low, too long, and you see money start flying around too quickly, getting a little too loose because everyone wants to get theirs, and then they start inventing things like mortgage-backed securities and everyone starts over-leveraging, because, why not, money is cheap! Then you get 2008.

twh270 5y ago
"Money is cheap" yes, also "you can buy a house if you can fog a mirror". (Buy as in acquire a piece of paper that says you'll pay $$$$ per month to whoever holds the note.)
- adamhp 5y ago
  Yes, fortunately we've learned from that mistake and I don't think are repeating that this time around. People really are qualified to buy these days, and there just isn't enough supply of housing to go around.
mywittyname 5y ago
It's important to separate out fraud from low interest rates. Low rates absolutely drive investment, and riskier investment at that. But the issue with 2008 was fraud in the lending market, not necessarily the low rates. Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.
- diognesofsinope 5y ago
  For the record, the evidence of 'widespread' fraud is extremely weak: See Antoinette Schoar's (MIT) work: https://www.nber.org/papers/w20848 https://www.nber.org/papers/w20848 It makes for a good news story that regular Americans understand and frankly want to hear (the banks were bad). But if you really dig into the reports, e.g. Financial Crisis Inquiry Report, almost the only fraud comes from misreporting of income which is essentially consumers lying. There could be other documentation issues, but underwriting almost entirely depends on credit score + income, so they're fairly trivial.
voisin 5y ago
> Lowering interest rates makes capital cheaper, which does spur investment and thus economic development There are diminishing marginal returns to this, and when rates were already close to zero it is hard to imagine going to zero spurred much more than meme stocks and YOLO gambles.
- adamhp 5y ago
  Correct. It is surely a non-linear function, but the statement "lowering interest rates makes capital cheaper" is generally true, and used as an economic lever in monetary policy.
vmception 5y ago
mortgage backed securities werent the problem the leverage for nonexistent (or overclaimed) mortgages were leading to a crisis of confidence where credit dried up because banks didnt trust each other got to watch for that. know the contents of your securities

by adamhp 5y ago

twh270 5y ago

"Money is cheap" yes, also "you can buy a house if you can fog a mirror". (Buy as in acquire a piece of paper that says you'll pay $$$$ per month to whoever holds the note.)

adamhp 5y ago
Yes, fortunately we've learned from that mistake and I don't think are repeating that this time around. People really are qualified to buy these days, and there just isn't enough supply of housing to go around.

mywittyname 5y ago

It's important to separate out fraud from low interest rates. Low rates absolutely drive investment, and riskier investment at that. But the issue with 2008 was fraud in the lending market, not necessarily the low rates. Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.

diognesofsinope 5y ago
For the record, the evidence of 'widespread' fraud is extremely weak: See Antoinette Schoar's (MIT) work: https://www.nber.org/papers/w20848 https://www.nber.org/papers/w20848 It makes for a good news story that regular Americans understand and frankly want to hear (the banks were bad). But if you really dig into the reports, e.g. Financial Crisis Inquiry Report, almost the only fraud comes from misreporting of income which is essentially consumers lying. There could be other documentation issues, but underwriting almost entirely depends on credit score + income, so they're fairly trivial.

voisin 5y ago

> Lowering interest rates makes capital cheaper, which does spur investment and thus economic development There are diminishing marginal returns to this, and when rates were already close to zero it is hard to imagine going to zero spurred much more than meme stocks and YOLO gambles.

adamhp 5y ago
Correct. It is surely a non-linear function, but the statement "lowering interest rates makes capital cheaper" is generally true, and used as an economic lever in monetary policy.

vmception 5y ago

mortgage backed securities werent the problem the leverage for nonexistent (or overclaimed) mortgages were leading to a crisis of confidence where credit dried up because banks didnt trust each other got to watch for that. know the contents of your securities