Why low rates are not good...

Question

"Risk taking generates growth by moving resources to enterprises which create future jobs and consumption opportunities.

Without stable and transparent economic roles that allow and encourage a reasonable return for risk taking, growth will not occur, as even wrong entrepreneurs will refuse to take risk.

Low interest rates do not encourage creative risk taking, but create just more highly leveraged investments in low risk instruments.  Hence the leverage to risk taking created by the Fed's low rate policies do not result in productivity.  It just distorts temperate risk taking."

-Dr. Peter Linneman

Jon Q. · Answer

NA Beard

Low rates = cheap $ = absence of an urgency to act in the face of little opportunity costs

High rates = expensive $ = high opportunity costs = strong sense of urgency to act/create/build

In other words...cheap money makes entrepreneurs, whose ventures create jobs and consumption opportunities, lazy.

Chris Mason · Answer

The fed setting the overnight funds rate (short term rates) has little guaranteed direct impact on mortgage (long term) rates.

There was much ado about the fed "raising rates" in December.

What actually happened:

- Fed raised prime 0.25%, so my go-to HELOC (short term debt, like a credit card) is now 0.25% higher.

- Wall Street lost their shit for two weeks ("volatility" is what the economists call it when Wall Street loses it's shit), 30 year fixed mortgage rates went up, down, sideways, did a back flip, and went all over the place. People started calling me trying to day trade their mortgage, in two cases rates actually changed in the 5 minutes between when the borrower and I agreed to terms and when I went to push the "lock this rate" button. In one case it was a change for the better so I locked, in the other case I had to call the borrower back with bad news.

- After that two weeks or so, rates stabilized at a LOWER point than before the fed "raised rates."

Could I have predicted that it would play out like that ahead of time? No, not with >70% accuracy. Anyone that COULD predict that with >70% accuracy should be on Wall Street making a billion dollars a la the film "The Big Short."

So these liberal/conservative academic "economists" claiming they can predict the future? Prove it. Go make a billion dollars, twice in a row, both times making unorthodox predictions. Then I'll listen to you.

My $0.02.

Steve Vaughan · Answer

Hi @Jon S.!  Are you referring to the impact of low rates on RE and the 'bubble-icious' prices in a lot of areas? The creation of more highly leveraged instruments in low risk instruments sums it up nicely.

I'm seeing it here in little ol' central WA and am pondering selling 30% of my portfolio into the froth.  Lots of cash chasing a shrinking inventory here.  Lots of 'I wanna be a real estate investor' all over like the days before the crash.  It's definitely 'sexy' again.

Do you think the music is going to stop soon?  Will you have a chair? Thanks!

Jon Q. · Answer

@Steve Vaughan

The "music" can't stop if the Fed plans to continue paying its debts.  Not only that, but it's meddling has contributed significantly to economic disparity in America.

Jeff B. · Answer

Strong conservative bias clearly seen.  Low rates do allow for consumer activity and that is the lion share of the economy, not BIG Business plant expansion (that's occurring where the globalization sent all the jobs over seas).  Car loans, property Purchase/Refi and credit spending is floating the boat for us all.

Why low rates are not good...

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