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August 29, 2010 – Comments (2)

I am Superman: The Federal Reserve Board and the Neverending Crisis

Got the link from Big Picture.  The article is 40 pages, here's the introduction:

During the 2007-2009 financial markets crisis, the Fed seemingly left behind the mandate to conduct monetary policy in such as way as to achieve price stability and full employment. Specifically, the decisions taken during the financial crisis seem to be an effort to placate political constituencies by bailing out private sector banks and, earlier, by not exercising appropriate prudential supervision of Fed members banks and bank holding companies (BHCs).

2 Comments – Post Your Own

#1) On August 29, 2010 at 11:04 AM, dwot (40.93) wrote:

Why is it so hard to consider that policy that allows a fix percent of income to debt servicing as rates decline is the problem with low interest rates rather then the low interest rates themselves?

With this mathematically insane policy you end up with insane growth in borrowing power and hugely reduced empowerment to reduce debt.  With higher rates you can dramatically reduce your burden by simply applying extra payments that are manageable and you end up with huge savings on interest.  When most of what you are expected to pay back is principal there is no such empowerment.  So big deal, you slave like crazy to make extra payments to what end?  So  your mortgage is paid back in 28 instead of 30 years?

No, the lend standard should use a fixed rate, like 8 or 10% for the percent of income and then some slight increases based on the credit worthiness of the borrower and downpayment.  The mortgage term should automatically be shorter for lower rates, like in the range of 20 years for current rates.

That would be a good way of doing it, 30% of income at 10% for a 30 year terms, and take off 2 years from the mortgage term for every 1% decline, so 20 years at 5% using 30% of income.

Now if a borrower gets in trouble you can extend the mortgage term and have some meaningful reduction in payment.  And since people can't borrow insane amounts of money, you can't get massive housing bubbles, only little ones.

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#2) On August 29, 2010 at 8:41 PM, OneLegged (< 20) wrote:

I fear that as long as politics are involved, logic plays ZERO role here. 

 

What you ask is unanswerable in the current reality.

 

You post is excellent and make perfect sense, but........ 

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