[allenf]

It's worth getting your head round the ideas.
Here in the UK, when Labour came to power in 1997, one of the very first things they did (and one of the best things IMO, without getting political) was to hand control of the rate-setting to the Bank Of England. Before this, traditionally the interest rate was set - and manipulated by - whichever political party was in power, who - inevitably - used rate control as a "bribe" to their loyal and/or wavering voters at election time.
Of course this was not good for the long-term economic health and stability of the country...

 

[Uncle Erik]

If you're in school, take a macroecon class. The material is not that difficult and you'll learn a lot of valuable concepts. Once you begin to understand this stuff, the financial section of the paper gets a lot more interesting.

As for the housing bubble? I don't think Greenspan did enough to keep speculators out of the market. Sales of new homes were down 10% last month and off something like 29% in the west and southwest US. And the problem with spec is that it drove up perceived equity. A lot of people have been treating their new "equity" as an additional source of income by spending it.

We'll see how this turns out.

 

[SiBurning]

Interest rates paid to depositors is based on the money market rate, which is short term rates, which tends to be roughly the same as the fed rate. The banks are paying you to give them deposits, which they can then lend out or use as reserves to cover loans they already lent out. In essence, you are directly financing their business, so they might even pay you above the fed rate or the 30 day rate if they're desparate to increase their deposits.

Mortgages are long term loans, so they tend to follow the 10 year treasury rate. You'll always pay a decent premium over the 10 year treasury rate because there are several layers of financial institutions that all need to skim their points (a point is 1/100 of a percent), and it adds up. Exception to this include those teasers that run out in a year or two, in which case they're financing that part short term, so they can base it on the money market rate.

As for the difference between the rate of long-term and short-term loans, the longer duration loans tend to be more expensive (higher interest rate) because... well, there's a number of ways to say this... I prefer to say that future goods are sold at a discount over present goods. If you paid for something today, wouldn't you want a discount from someone that wouldn't deliver the goods for 10 years? The truth of this is that all prices are based on supply and demand, so if people demand to borrow more long term money (compared to how much short term money they want), say more mortgages, it takes more money (higher interest) to entice the extra lenders to cover all those loans.

If you really want your head to spin, in today's market, this extra demand for mortgages actually causes the interest rate on the 10 year treasury to fall. That means increased demand for mortgages causes them to be cheaper to borrowers. Theory falls apart. The reality of today's financial marketplace has nothing to do with any theory because noone has a reasonably complete monetary theory that fits today's financial system. If you want to go there, you have a long, stange trip ahead of you.

 

[AlanY]

For those interested in learning a bit more about real-world macroeconomics, I find Morgan Stanley's senior economists' daily "Global Economic Forum" blog usually pretty interesting reading:
http://www.morganstanley.com/GEFdata...st-digest.html
Their senior economist, Stephen Roach, only writes two or three times a week, but he really goes into depth, and it's also interesting to read the other, sometimes divergent, opinions from other parts of the world.

That said, it's also useful to remember that macroeconomic theory is often more helpful at understanding the past than predicting the future. Warren Buffett is known for his disinterest in macro, and it certainly hasn't stood in his way.

 

[Connectz]

Quote:

Originally Posted by fearless Watch out, I saw a guy with a freemason logo as his avatar on here recently.

Who me? I'll just give you one piece of advice; Don't believe everything you read on the internet. Most of "it" is simply not true.

 

[ls20]

Quote:

Originally Posted by fearless Watch out, I saw a guy with a freemason logo as his avatar on here recently.

i was looking to buy a serious wristwatch on ebay, so i had to do a ebay check on his transaction history to make sure itll be a good transaction. turned out 90% of his 200 purchases were all freemason paraphernalia

auction turned well though and i received a nice watch

 

[zowie]

Quote:

Originally Posted by Uncle Erik If you're in school, take a macroecon class. The material is not that difficult and you'll learn a lot of valuable concepts. Once you begin to understand this stuff, the financial section of the paper gets a lot more interesting.

Looking back from the distrance of 20 years, basic macro econ was probably the single most useful course I ever took. I think it should be just as mandatory as writing. You can't truly understand politics without understanding economics. So much **** people espouse is just wrong because they're ignorant of economics. It's also helpful for taking care of your financial future, although not enough by itself. I would have like to have studied it in depth but I'm too lousy at higher math.

Edit: what the hell?? I've been censored!

 

[Connectz]

Trust me, a lot of that conspiracy theory stuff is simply not true. Some of it holds truth but a lot of it doesn't.

There are a lot of liars in the world.

 

[zowie]

Quote:

Originally Posted by Connectz Trust me, a lot of that conspiracy theory stuff is simply not true. Some of it holds truth but a lot of it doesn't. There are a lot of liars in the world.

You're being too generous. The vast majority of it is wrong and a lot of it is just plain stupid.

 

[fearless]

Quote:

Originally Posted by Connectz Who me? I'll just give you one piece of advice; Don't believe everything you read on the internet. Most of "it" is simply not true.

I was only joking.

I do find freemasonry facinating though.

 

[Connectz]

Quote:

Originally Posted by fearless I was only joking. I do find freemasonry facinating though.

Trust me, Freemasonry is a great thing despite the huge amount of bullcrap posted about it on the internet. If you are interested in becoming one, find a relative to sponser you or go to a lodge near you and ask for details on how to become one. They will then set up a meeting with you where one of them (pending they think you are a good candidate) will become your sponsor.

 

[kerelybonto]

An important point that no one's mentioned is that the Federal Open Market Committee can't set interest rates by decree. The FOMC picks a target rate, based on its view of inflation and economic growth, and then buys or sells short-term Treasury bonds to bring the federal funds rate in line with its target.

To coax the federal funds rate down, the FOMC buys bonds, injecting fresh money into the economy. More money chasing the same number of bonds means the price of those bonds will tend to rise; thus, yields -- the rates of return on the bonds -- fall. (Because bonds are fixed-income securities, their price and yield are mathematical inverses: when one falls, the other rises, and vice versa. It's often easier to think in terms of prices than yields.) The idea is that the drop in short-term bond yields will work its way into markets for other securites, creating a general drop in interest rates (which, of course, is just a general terms for yields).

The reverse, causing interest rates to rise (as the Fed has been doing since the middle of 2004), means selling short-term bonds to take money out of the economy. Short-term yields rise (prices fall), and eventually investors demand higher rates of return on other securities, causing a general rise in interest rates.

(This characterization is a bit simplified. The Fed doesn't often buy or sell bonds outright. Rather, it uses short-term contracts to sell [or buy] and then repurchase [resell] bonds, called re-purchase agreements or "repos" [reverse re-purchase agreements or "reverse repos"].)

Eric

EDIT: Whoops, had a "buying" where I should have said "selling" in the third paragraph.