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New and exciting financial products!
MKR
Registered User regular
Registered User regular
http://www.nytimes.com/2009/12/17/business/economy/17fed.html
It's the manner of the financial industry to start working on new and exciting ways to wreck the economy just as soon as the dust settles from the last collapse. I haven't been watching as closely as I probably should, but I'm sure we have some people here who have been keeping an eye out. What's the next recession likely to look like, and who will be to blame?
Fed Will Hold Down Rates, Citing Tenuous Recovery
By CATHERINE RAMPELL
Published: December 16, 2009
WASHINGTON — The Federal Reserve said on Wednesday that it was still wary of raising interest rates because it believed the economy remained fragile but took steps to wind down emergency lending programs.
In a statement released after two days of meetings by the Federal Open Market Committee, the central bank said its benchmark overnight interest rate would remain at virtually zero, its level for the last year. The Fed repeated its expectation that it would keep rates “exceptionally low” for “an extended period.”
Most of the language in the report was unchanged from statements released after other recent Fed meetings, although it was marginally more upbeat. Together with recent comments from other economic policy makers — and Wednesday reports showing increases in housing construction and subdued inflation — the Fed’s release illustrates growing, if cautious, optimism about the economy.
The committee said that economic activity, including household spending, had continued to pick up and that the deterioration in the job market was slowing. Improvements in the financial markets have also become “more supportive of growth,” the statement said.
But businesses are still cutting back on fixed investment, and employers still appear reluctant to hire.
“Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining,” Mr. Bernanke said in a speech at the Economic Club of Washington last week.
In its statement Wednesday, the Fed said that it was gradually slowing its purchases of mortgage-backed securities and other agency debt, and that most of its emergency liquidity programs would expire in February.
The Term Asset-Backed Securities Loan Facility, created to help banks supply credit to households and small businesses by supporting the issuance of certain asset-backed securities, is still expected to end by June 30.
The statement pointedly left open the possibility of changing these plans, however.
“The market with the greatest potential to give problems for the financial system is commercial real estate, so the Fed had to drop a hint that it was keeping its options open,” said John Ryding, chief economist at RDQ Economics.
The statement comes at a time when the central bank’s response to the financial crisis — and to its denouement — is being watched closely by traders and politicians alike. Lawmakers have been threatening to take away some of the bank’s supervisory powers and subject it to greater oversight.
The Fed chairman, Ben S. Bernanke, also endured some tongue-lashings in his reconfirmation hearings this month. The Senate Banking Committee has scheduled a confirmation vote on Thursday morning. If the committee approves Mr. Bernanke for a second term, his nomination will be considered by the full Senate.
Mr. Bernanke and the Fed face a difficult balancing act in the quest to return monetary policy to normal after two years of unprecedented intervention in the credit markets.
If the Fed waits too long to raise interest rates and draw down its balance sheet, it risks severe inflation. But tightening too early, or even intimating that it could tighten soon, might spook markets and derail the recovery.
Similar concerns about timing also affect the government’s fiscal stimulus projects, too.
Economic output grew at an annualized rate of 2.8 percent in the third quarter. Consumer prices increased 0.4 percent at a seasonally adjusted rate in November, according to a government report released Wednesday morning. Additionally, the Fed’s favored barometer of inflation, a measure based on consumer spending that excludes food and energy, has increased 1.4 percent over the last year.
November’s jobs report, which was better than expected but still showed payroll job losses on net, has signaled that the job market may recover in the coming months.
Mr. Bernanke is expected to be reconfirmed by Congress to serve another four years as chairman, in spite of some vocal opposition. His current term ends Jan. 31.
In an indication of his growing popular acclaim for his handling of the crisis — if not necessarily his leadership before the crisis — Mr. Bernanke was named Person of the Year by Time magazine on Wednesday. He has received similar accolades in recent weeks from other magazines.
It's the manner of the financial industry to start working on new and exciting ways to wreck the economy just as soon as the dust settles from the last collapse. I haven't been watching as closely as I probably should, but I'm sure we have some people here who have been keeping an eye out. What's the next recession likely to look like, and who will be to blame?
MKR on
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I am confused as to why this is supposed to be scary. Or, really, why it's news.
Well, I guess it could be argued that no news is news, because there've been noises made about raising interest rates lately in some quarters of the Federal Reserve system. So it sounds like they are holding the course steady for the moment at least, which is worth hearing from them.
I'm trying to think of any legitimate hedging strategy could use those, though I'm drawing a blank. A lot of other types of options can at least be used as a form of insurance, though I'm not seeing how a pure "pass/no-pass" bet on something like a stock or index could.
That sounds like something that you might see Vegas, or perhaps might not because Vegas might ban that particular type of gambling.
I'm also confused. Where are the bad new things?
If you can't see the bad things, then it's probably because it won't affect you. That's how this works.
I'm not an expert but everything I've heard is they are going to keep rates this low until at least the summer
Also, when you seem completely safe, that means the black helicopters are about to strike!
QEDMF xbl: PantsB G+
The more money one has, the more value those assets hold. A millionaire who purchases a $250k home sees a much greater return than a middle class family who takes out a $250k mortgage over 30 years.
It's ridiculous. Money, in order to maintain standard of living, costs more for those with less of it. 20% interest on credit cards; payday loans at 200% interest; mortgages, even at 7% interest, cost just sky of 250% of the actual loan value (100k mortgage costs roughly 240k at 7%). In the last example, there, each "dollar spent" on the 100k mortgage is actually only worth less than 50 cents.
Our culture is eating itself, financially. It would be one thing if these profits went back into communities, but they accomplish one thing and one thing only: they ensure that those without always are without, and those with always have their heart's content.
Ｉdon't really agree with your argument here. Your numbers are right and I agree that there's some predatory loans out there that need to be reformed like payday loans. Credit card interest rates ideally wold be lower, but aren't terrible.
I don't think your argument regarding mortgages holds up though. Everytime I read this argument it doesn't convince me. Just because someone has the cash upfront doesn't make the purchase any cheaper. Someone who buys a home with cash avoids paying interest, yes. But they also avoid earning interest on their money.
Furthermore this argument also ignores the real financial benefits given to people who borrow money to buy a home. Anyone who had the cash to buy a house they inteneded to live in themselves would borrow the money anyway to get the tax break. So even though in your example the interest rate is 7%, the real interest rate is closer to 4.5% (since mortgage interest is tax deductible). The higher earning the person who buying the home the lower the real interest rate (since they get to deduct the interest from a higher tax bracket).
To address your final paragraph: I definitely prefer the US system to those in some other cultures where people simply live at home or try to eventually save up enough money to buy a house outright, or with a 50% down payment. Or rely on their parents to have saved up enough money over their lifetimes to give you a home/down payment as a wedding present.
Or maybe its because I can read an article, understand everything being said and don't see how the article demonstates what the OP is said.
not in the US, if its your first home.
You're correct, but you've also assumed that the inequity in value is inherently moral.
For the reasons stated above, I find the practice of money-lending to be inherently immoral. I understand the benefits, but that's like saying it's more effective to just lop off someone's arm when they have a medical issue instead of treating the root cause.
Our financial system, as is readily apparent, benefits those with by preying upon those without. I find this to be an unacceptable and insufficient means of creating wealth.
Always. Please show me the math.
It's not supposed to. I cleared this up a few posts ago.
Closing costs, PMI and interest paid are tax deductable. There is also currently a $8K tax-free incentive. As its entirely possible $8K > .65 * associated fees, its currently possible for getting a mortgage and paying it off quickly could be better than just buying it. I bought a ~330K house (30 year mortgage) this year and while I've repressed many of the very large numbers involved I don't think my fees exceeded 12K.
QEDMF xbl: PantsB G+
I guess I will just disagree with you about money lending being inherently amoral. I think most home owners, small business owners, large businesses, etc. will agree with me. As will people who save their money for use at a later date. If lending weren't such a necessary part of the economy then banks reducing their lending recently wouldn't have resulted in a resession. But I do understand you just think its amoral, and I haven't argued with that statement. You're entitled to your beliefs, of course.
The math is simple and I shouldn't have to calculate it out for you. If you have a basic understanding of the tax system then you'll see that mortgage interest being tax deductible means you pay less. But I'll give you a simple example:
Assume you borrow 300k at 7% interst for 30 years. Your payments are $1,995.91/month.
For the first payment $1,750.00 goes towards interest and the remaining $245.91 pays the principle.
However, you're allowed to deduct $1,750 from your income taxes. (I don't know how much you want to assume you're making, but lets go with 50k putting you in the 25% tax bracket). So you don't have to pay taxes on that $1,750 saving you $1,750 * 0.25 = $437.50.
The millionaire who had the cash lying around would invest it elsewhere and, in most years, pretty easily get a return greater than 5.25% (7% * (1 - 0.25)
The more money you make, the higher the tax bracket you're in, meaning you'll save even more money on your taxes. So if you made 400k/year you'd be in the 35% tax bracket and your real interest rate would be
4.55% (7% * (1 - 0.35))
You may argue that you're still paying interest, and that you've 'lost' $1,312.50 but that's what it costs to use money you don't have.
I work in mortgage financing, and paying cash up front is always a better option. Tax deductions, rebate, etc. don't lower the total cost of a 30 year mortgage by more than 50%, or am I missing something?
You're missing the value of time.
edit: to clarify. If you pay with cash you're missing out on the earning potential of the money you spent on the house.
What did you expect? The body of the OP wasn't even on the topic of the title :P
And if the investment gets a shitty return or just fucks up?
Then you lose some money. Just like the bank will lose money if your house is foreclosed on.
Who should I trust, the dude who works in mortgage financing, or the dude who just said some stuff on the internet that I don't particularly agree with?
No, it's precisely about the title.
The important bit from my OP is bolded:
The clarification:
In the article things are getting better. History shows that things will get worse. The goal of the thread is to identify the cause of the next catastrophe.
This is the topic of discussion I was going for.
The one making a better argument. Unless you're a moron.
It is conceivable for not paying up front could be better, but only if your rate of return on your investment was greater than that of your mortgage interest rate and the way banking works that's fairly unlikely.
QEDMF xbl: PantsB G+
Cause of the next catastrophe?
Excessive hunger for large profit margins.
As the article points out, even after the bailouts and recession, congress seems unable and unwilling to actually enact any further regulation in the industry. Investors will continue to make "fast cash" transactions and will continue to make risky investments for a quick payoff.
Economies work in cycles of boom and bust, and our bankers spend countless hours figuring out how to make that boom bigger and more profitable.
It's like the mortgage industry. The vast majority of fucks who made predatory, bad loans lost their jobs, but kept their huge payouts. I know many colleagues of mine who purchased huge homes when everything was at it's best, and continue to afford them after the fact because that single boom was all they needed to get their foot in the door.
As long as our continued goal is expansion of profit, we'll continue to see boom and bust.
This sounds good to me, but it works under the assumption that the credit was unnecessary in the first place. Which somewhat reinforces my original point over the value of money.
This isn't really what I was getting at. The early replies to the thread show what I mean. Specifically, "new and exciting financial products." You know, the title.
Then I have no idea what you're getting at. Unless you're looking at new and exciting credit default swaps, and the farce that is privately run credit rating companies.
First page of the thread, before it went wildly off topic.
Yeah. I still have no idea.
I'm also barely functioning. Can you sum it up in a sentence or two?
It's possible to make a better argument for something and still be completely wrong.
If this is about new financial instruments, that is a complex topic. Please go ahead and assume that people smarter than you are managing our economy in complex ways that make your entire living standard possible, but at the same time will occassionally get too complicated and risky and things will be less good for a while. Even at the trough of the recession, your life is far better for the existence of moneylenders and brokers and investors and and hedge funds and the like than it would be without them. Sure, the guys on top benefit far more than you do. But all of it is what makes the economy work, what makes your job exist and makes the products you like affordable. If you are thinking about saving money, it's never a bad idea. Even if you never save enough to buy that house outright, you can probably save enough that the next recession will, instead of destroying you, protect you and enable you to put that extra money to relatively very good use.
And you probably should, because if you are mortgage free you have a lot more financial freedom it seems.