[FoRK] What's that sound???

Albert S. albert.scherbinsky
Wed Jul 27 07:23:29 PDT 2005

Good point on the influx of cash from outside the U.S.
keeping long term interest rates including mortgage
rates low.

This phenomenon has been referred to as a conundrum by
Alan Greenspan, up until recently he claimed to not
know why it was happening. Perhaps because he really
didn't know, or perhaps because as you may know the
Federal Reserve tends to be tight lipped about it's
goings on.

Now, if we trace back where all this 'foreign' cash
comes from it will lead us straight back to the U.S.
federal reserve. As you may already know it is the
Feds job to manage U.S. monetary policy. It does this
basically through two mechanisms, adjustments to the
money supply through sales and purchases of debt
securities, and by setting the Fed Funds interest

Back in 2002 the Federal Reserve opened the floodgates
of liquidity by taking the Fed Funds interest rate
down to 1%. Simultaneous to this, I should note,
Predident Bush was also stuffing money into the
pockets of Americans by lowering taxes. American
consumers took this money and used it to go on a
buying spree, buying up Chinese and Japanese made
goods. This lead to a ballooning of the trade
surpluses of China and Japan and a surplus of U.S.
dollars in the Chinese and Janpanese central banks.
Those central banks took those U.S. dollars and bought
U.S. Treasury securities. And, as you already know
demand for bonds pushes up the price for the bonds but
lowers the yeild(interest rate).

Some details have been left out, but as you can see
the surplus of money keeping mortage rates low is not
originally 'foreign'.


--- Jim Whitehead <ejw at soe.ucsc.edu> wrote:

> Prior to owning a house, I used to think the same
> thing. But, it turns out
> my generation has a higher percentage of home
> ownership than prior
> generations.
> Besides, if you're right, and home prices stay high,
> that would imply that
> current valuations are an accurate reflection of the
> value of a house (and
> hence we're not in a bubble). If we are in a
> speculative bubble, then home
> prices should fall after the bubble ends, thereby
> increasing affordability.
> In any event, my understanding is that the low cost
> of mortgages comes from
> the large influx of cash from outside the US, and
> from corporations in the
> US, all seeking someplace to find moderate returns
> on that cash.

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