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An fun exercise is to ask random people you know why changes in interest rates are so important and so diligently reported by the press. My own experience is mo

by harryf 15y ago

An fun exercise is to ask random people you know why changes in interest rates are so important and so diligently reported by the press. My own experience is most people have no idea.

twoodfin 15y ago
I think most people understand that lower interest rates mean it's easier to afford a larger mortgage or car loan. That being said, the beauty of free markets is that individual agents don't have to understand macro (or even micro) economics to make good decisions: Prices provide all the information they need. Interest rates, materials cost, labor cost, dealer margin... who cares? All that matters is whether I think it's worthwhile to make a $300/month payment for this car. That's why relatively stable prices are important. Uncertain future prices make the cost/benefit trade-off of economic decisions too complex for the average person to make rational choices.
- drumdance 15y ago
  Plus there is usually a seller trying to convince you why buying is such a great idea.
polymatter 15y ago
Most people have no idea because most people do not make any decisions based on interest rates. It just isn't material in their decisions. If you tell me next thursday it will be rainy, I'll remember to bring my umbrella. But tell me interest rates go up and it doesn't really affect my decision to get a mortgage or not. Either, I've found the perfect house with a mortgage that is affordable (in which case I sign) or I haven't. At no point does knowledge of the interest rate make any difference in my decision. I think the real reason its reported as its a nice round figure that is a barometer of sorts on the economy. Great for providing some meat around a story. Bonus points for sounding like the sorts of thing smart and respectable people would want to know. I'd be interested in your opinion about why changes in interest rates are so important for the press.
- alexhawket 15y ago
  The interest rate is a measure of the leverage you can apply when buying that mortgage. Lower interest rates mean more leverage. Increased leverage increases risk. If they lower the interest rate, you can buy a more expensive home.. but you increase the risk you'll lose all your equity from a small change in house prices. Right now in the US, more than 30 percent of homeowners are underwater on their mortgage. If they decide to raise interest rates and you have a variable rate mortgage or have to renew it, your mortgage payments can shoot skyhigh. Either way, record low rates make the system susceptible to systemic shocks and cascade failures. Free trade and de-regulation means capital is free to flow quickly around the world. Investors can lose faith and a country can go from solvent to bankrupt in a matter of months. Interest rates shoot up and anyone caught with debt races to pay it off with dwindling incomes while the payments get bigger every day.

by harryf 15y ago

An fun exercise is to ask random people you know why changes in interest rates are so important and so diligently reported by the press. My own experience is most people have no idea.

twoodfin 15y ago

I think most people understand that lower interest rates mean it's easier to afford a larger mortgage or car loan. That being said, the beauty of free markets is that individual agents don't have to understand macro (or even micro) economics to make good decisions: Prices provide all the information they need. Interest rates, materials cost, labor cost, dealer margin... who cares? All that matters is whether I think it's worthwhile to make a $300/month payment for this car. That's why relatively stable prices are important. Uncertain future prices make the cost/benefit trade-off of economic decisions too complex for the average person to make rational choices.

drumdance 15y ago
Plus there is usually a seller trying to convince you why buying is such a great idea.

polymatter 15y ago

Most people have no idea because most people do not make any decisions based on interest rates. It just isn't material in their decisions. If you tell me next thursday it will be rainy, I'll remember to bring my umbrella. But tell me interest rates go up and it doesn't really affect my decision to get a mortgage or not. Either, I've found the perfect house with a mortgage that is affordable (in which case I sign) or I haven't. At no point does knowledge of the interest rate make any difference in my decision. I think the real reason its reported as its a nice round figure that is a barometer of sorts on the economy. Great for providing some meat around a story. Bonus points for sounding like the sorts of thing smart and respectable people would want to know. I'd be interested in your opinion about why changes in interest rates are so important for the press.

alexhawket 15y ago
The interest rate is a measure of the leverage you can apply when buying that mortgage. Lower interest rates mean more leverage. Increased leverage increases risk. If they lower the interest rate, you can buy a more expensive home.. but you increase the risk you'll lose all your equity from a small change in house prices. Right now in the US, more than 30 percent of homeowners are underwater on their mortgage. If they decide to raise interest rates and you have a variable rate mortgage or have to renew it, your mortgage payments can shoot skyhigh. Either way, record low rates make the system susceptible to systemic shocks and cascade failures. Free trade and de-regulation means capital is free to flow quickly around the world. Investors can lose faith and a country can go from solvent to bankrupt in a matter of months. Interest rates shoot up and anyone caught with debt races to pay it off with dwindling incomes while the payments get bigger every day.