Comment by pdonis | Hacker News Reader

Comment by pdonis | Hacker News Reader

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> could you substantiate it with something from a serious, non-partisan economist?

The fact that printed money is fueling the housing market does not require an economist to see; it is obvious from comparing two simple observations:

(1) Americans expect to be able to get 30 year mortgages at rates around 3%.

(2) Americans expect to be able to invest their retirement savings in stocks and bonds with a long term rate of return of 8% or more.

This state of affairs would be impossible in a free market with a money supply that was not being manipulated; in a free market, nobody would be crazy enough to lend money for mortgages at 3% when they could invest the same money in stocks and bonds and make an 8% return over the same time horizon. The only reason #1 above exists at all is that mortgages are made with printed money from the Fed.

> rates have been very low for a long time

That's because interest rates are not determined by a free market; the Fed has its thumb on the scales (see above), and has for decades.

> does not require an economist to see

IME, people have lots of theories that look good to amateurs. Look at physics, as a striking example of how wrong amateurs can be for thousands of years.

Anyway, you aren't required to do research for me, but some person on the Internet writing economic theory is not persuasive to me. Oh well.

Yes I agree with this. In fact, having already done this math myself I am basically maxed out in house loans, i even took a cash out loan on my rental and dumped it into the stock market… I have already made an absolute killing doing this. Unfortunately I am not that smart and like you say, everybody else can come to this same conclusion. It will not end well.

#1 is less risky, since mortgages have to be collateralized. #1 is also less volatile

> #1 is less risky, since mortgages have to be collateralized.

Less risky, yes. Less risky to the tune of 5 or more percentage points? Not so sure.

> #1 is also less volatile

That depends on the housing market, which can be subject to large fluctuations that have nothing to do with the underlying value of the assets and everything to do with the availability of newly printed money for mortgage loans. The years leading up to and including the 2008 crash showed how volatile a manipulated housing market can be.

Yep. Fannie and Freddie are buying nearly all of the mortgages in the US right now, so the only people lending money at 3% (or less) is the US government.

the money being lent is bank money.. not printed by the fed but by your local bank.

Your local bank can only "print" the money because that amount of money is in its account at the Fed. It's the Fed that's actually creating the money.

No, because the bank can borrow the reserve from another bank. That's the whole point of the overnight market.

But what if no other bank has any reserve to lend? Why then you have a banking crisis as collectively the banking system is short of reserves, at which point the Fed steps in and injects whatever quantity of reserves are necessary to make up the shortfall. So the idea that the Fed would allow a banking crisis in order to limit reserves to some arbitrary quantity is ludicrous. The Fed was created to make sure banks always had enough reserves. That's why we have a Federal Reserve system in the first place.

And in fact there are guarantees -- the bank can take a government bond and automatically borrow reserves with the bond as collateral, directly from the Fed, so the Fed stands ready to convert any bond given by the banks into reserves whenever the banks want. This is the repo market, so you don't need to borrow overnight from another bank if you have a treasury bill or bond, you can borrow your reserve directly from the Fed itself.

https://www.newyorkfed.org/markets/domestic-market-operation...

In short, the Fed controls the price of reserves -- the interest rate paid when borrowing reserves -- and it stands ready to provide banks with whatever reserves they need at the policy rate. Thus the Fed sets the price, and lets the quantity float.

You may also be interested in other nations such as Canada that have eliminated reserves and switched to a corridor system.

That the Fed doesn't care about monetary aggregates is aptly described in this FRBNY note:

https://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html

More modern theories that strongly dispute that assertion. And certainly the money needed to pay compound interest on the loan has not been created. (Apparently it's expected that borrowers will materialize it.)

"Banks first lend and then cover their reserve ratios: The decision whether or not to lend is generally independent of their reserves with the central bank or their deposits from customers."

[https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...]

Few banks get anywhere close to their reserve ratio.

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