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American Capital Agency Corp. Message Board

rimboomer 4 posts  |  Last Activity: Aug 29, 2014 7:17 AM Member since: Oct 26, 2010
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  • rimboomer rimboomer Aug 29, 2014 7:17 AM Flag

    Jack,
    My point was to show how a linear system overheated, went to the extreme by feeding back on itself with chaos being the final result.

    RIM

  • rimboomer rimboomer Aug 28, 2014 4:43 PM Flag

    No question that sub-prime lending to people who couldn’t pay off the loans brought about the collapse, but my point wasn’t interest rates per se. It was the difference between the lending rates and the perception of the rate at which the value of houses were increasing that created all the high risk taking in the first place. You borrowed $500k with nothing down at 5% interest for a $500K home. The value of the home increased by 20% per year. In two years you sell your home and your profit was the difference between what you paid in interest $50K and what you sold your home for $720 minus $500 which would be $220K minus $50K or $170K.

    You would not have had subprime lending if there wasn’t that perceived protection that the home would increase in value enough to off set the risk. For a number of years this was the case and seemingly everybody took advantage of some form of exploiting the equity in their homes. None of the housing bubble would have existed without this significant different in lending rates and home appreciation rates.

    RIM

  • rimboomer rimboomer Aug 28, 2014 9:32 AM Flag

    Lenloc, you said “we have to look for something dramatic which happened in the very early part of this new century.” Here is one thing that happened that includes both linear systems and chaos theory. It’s not the only thing, but it sure played a major role in what has happened.

    The linear system that eventually exploded: If you purchased a house and maintained it, it would appreciate in value. Interest rates remained in the 2% to 4% range and houses appreciate at about the same rate. However, in the 1970s and 80s interest rates exploded which resulted in accelerating house appreciations.

    When interest rates dropped the housing appreciating rate did not and an economic opportunity was recognized and exploited. Going forward, EVERY ECONOMIC MODEL AND INVESTMENT SCHEME INVOLVING MORTGAGE INTEREST RATES WAS PREDICATED ON THE BELIEF THAT HOUSING APPRECIATION WOULD CONTINUE AND GROW. Greater and greater risks were taken because the rewards were significant as long as houses continued to appreciate in value.

    The risk became too great for the financial system to support and it went bust. Chaos ensued. Houses quickly lost value. The financial and economic system that supported it, collapsed. The exploitation of the wealth that was created in that linear system created the feedback that grew the system beyond its sustain ability.

    How do we fix it? What we can’t do is go back to the original model. As Einstein said, “No problem can be solved by the same consciousness that caused it in the first place.” Something else will have to come along to rebuild our economy to the glory it was. The economic system we have now requires interest rates to remain low or it will collapse. Just saying.

    RIM

  • Reply to

    Yellen got it right

    by jackhilr Aug 22, 2014 10:22 AM
    rimboomer rimboomer Aug 22, 2014 10:32 AM Flag

    What if interest rates aren’t raised? I’m talking about not raising the interest rates for another 10 years or longer. Sounds crazy, but I don’t think so. First of all, corporate America has learned how to be very profitable over these last 5 or 6 years, by cutting back on labor and getting more out of the labor force they retained. They have cut away low and non-profitable endeavors. They are flush with cash and the mind set of growth forever no longer seems valid.

    As longs as banks can borrow at zero and purchase Treasure notes for a net profit for doing nothing, why should they take higher risk? The unemployment rate is dropping, even though the jobs are not on par with the ones lost before the crash. Let’s face it, this is where the job creators are the most active, if in deed they are active. The government says inflation is not increasing, but when was the last time the government bought groceries. Everything is up at Kroger and Safeway.

    Of course the biggest barrier to raising interest rates is the national debt. Nothing good can come from having to service the national debt with higher interest rates.

    I think rates will stay low for a long, long time. We are looking at the “new norm” in interest rates and our economy. The large middle class here in the US was created after WWll. It was an aberration and now we are returning to the norm. It’s not what I want, but I don’t think things are going to get any better than what we now have. There appears to be more incentives to make do with what we have than to take bigger risks to grow.

    Just saying.

    RIM

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