Ideas.

mariaalice

I do not know a lot about economics, but I like the subject and read a lot and follow some economists blogs.

If interest rates were left to float as the market saw fit with out any interference except for one important area, mortgages.

So that by law mortgages had to be take out at a fixed interest rate fixed for 10 years at a time and by law a family or individuals home could not be used as security for any sort of credit ( but any other property the individual owned could by used as security for credit )

And

Banks were forbidden by law from using a family or individuals home as security for any business loan.

Would the above stop bubble economy's developing

Permabear

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antoobrien

Permabear wrote: »

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The LIBOR (London InterBank Offered Rate) & Euribor scandals indicates otherwise. The city routinely manipulated both rates to keep them artificially low thus boosting their profitability, while also having the effect of keeping credit at an unreasonably low price. Not so bad if credit should be at a low price, but in 2007/8 when it should have been rising it re-enforce the false credit bubble.

Permabear

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KyussBishop

Permabear wrote: »

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So because they held an artificially low rate during the economic crisis (not greater than a period of 4-5 years), thus indirectly benefiting mortgage holders (while lying to the markets as to the firms financial health, making the situation more volatile, and corrupting transparency), that short period balances out the decades of screwing mortgage holders and society in general?
It's a pretty weak apologist argument, trying to downplay/diminish the effects of the massive fraud at play here.

Lets see, here is just one example of people being screwed, and this was relating to mortgages:
https://en.wikipedia.org/wiki/Libor_scandal#Mortgage_rates_manipulated_on_reset_date

Seems like those people didn't benefit, and that wiki page shows a litany of other fraudulent gains, taken from various parts of the markets and society in general.


How is that not economic 'rent seeking' (siphoning off totally unearned profits from society, a kind of 'tax', and fraudulently in this case), on an enormous scale?

That's what happens when you legitimize-fraud/deregulate; financial actors try to siphon off unearned profits (it's easy money in the end), because there is nobody to see/investigate them performing these fraudulent actions, and in some cases (the further you go towards deregulation) there isn't even a definition of fraud to hold people accountable to.

LIBOR is a pretty good example of how the financial industry can not be trusted to self-regulate and be transparent, and how blanket-deregulation (treating regulations as all bad) inherently promotes fraud, with financial actors more than wiling to engage in fraud where they can get away with it.


In the end it's not a surprise really, because when you look away and give people the ability to hide fraud, or even worse, remove any definition of fraud and say you trust people to be ethical (or trust society to regulate them, when nobody can see what's going on); it's not a surprise at all that people start abusing the markets for their own unearned gain, because when the gains massively outweigh the costs, then of course people will engage in fraud.

Not only will people engage in fraud, but the profits from fraud make them more competitive, thus pushing others out of the market who don't engage in the same fraud, because they can't compete (the greshams dynamic).
So fraud like that will never be a limited occurance, it will take over the market unless something is done about it, unless it is regulated and stamped down on.

antoobrien

Permabear wrote: »

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Realistically we have options of a central regulatory body or the markets setting the rates. Neither can do it one their own and both need oversight in order to prevent politics and profit chasing from doing the damage of the past 5 years.

To me the question is not so much who sets the rates - be it the ECB or the Euribor market - as what mechanisms & metrics are used to set it.

The problem that the central banks face is that they're not psychic and have to make decisions that best suit their monetary outlook. For most of the Eurozone lifetime that has been combating inflation, while promoting core growth, now it's promoting growth without inflating (a tricky prospect). It was the converse in the USA, under Greenspan it was growth, growth, growth. The key to that kind of policy is having the a set of metrics that says we can turn down the heat - which arguably were missing (and the ones we did have were almost certainly ignored).

Valmont

antoobrien wrote: »

Realistically we have options of a central regulatory body or the markets setting the rates. Neither can do it one their own and both need oversight in order to prevent politics and profit chasing from doing the damage of the past 5 years.

Why can't rates be left out of the remit of a regulatory agency entirely?

antoobrien

Valmont wrote: »

Why can't rates be left out of the remit of a regulatory agency entirely?

If you leave the rates to the markets alone, it opens it up to the possibility of insider abuse - the LIBOR scandal, which happened under the "soft touch" regulatory enviornment of the last decade being an example of this.

MadsL

mariaalice wrote: »

So that by law mortgages had to be take out at a fixed interest rate fixed for 10 years at a time

My US mortgage is 30 years fixed. Pretty happy with 4%.

Irish banks have it easy and lenders are at the mercy of interest rates.

Sand

mariaalice wrote: »

I do not know a lot about economics, but I like the subject and read a lot and follow some economists blogs.

If interest rates were left to float as the market saw fit with out any interference except for one important area, mortgages.

So that by law mortgages had to be take out at a fixed interest rate fixed for 10 years at a time and by law a family or individuals home could not be used as security for any sort of credit ( but any other property the individual owned could by used as security for credit )

And

Banks were forbidden by law from using a family or individuals home as security for any business loan.

Would the above stop bubble economy's developing

Sure, if a family or individuals home could not be used as security for any sort of credit then a bubble economy would not develop. Banks just wouldn't give out mortgages. People would simply have to pay for whatever shelter they could afford out of their weekly earnings.

The idea of holding the family home outside of normal economics is a tempting one. It has been tried, many times before. At risk of tempting Godwins law, it was tried in Germany between 1933 and 1945 in what was a "Stop the world. I want to get off." style economy. It failed.

The basic conditions for preventing a bubble economy in the current environment are sticking the losses to the investors (I.E. families lose the house, banks lose the loan) plus indifferent regulation.

KyussBishop

The topic of what causes bubbles, and how to mitigate them, is a pretty complicated and still very much debated one really, so I don't think there can be a one-size-fits-all fix to it.

There are so many factors that can affect the price of houses, that you really have to balance multiple things to prevent a bubble forming, but one of the starting points is properly restricting the availability of credit to people seeking a mortgage, as that directly affects the price of housing.


It's an area that can be prone to significant political corruption though, as inflating the price of houses is one of the best ways to make silly amounts of money at the expense of others, and there will always be efforts by interested parties to promote this kind of bubble, and to undermine government attempts at preventing this.

Mainstream economic theory made it really easy for interested parties to promote and massively profit from this bubble, because the theory generally completely ignored the significance of private debt in the economy, which (the excessive growth of) is one of the most blindingly obvious indicators of an economic bubble.


Graduating to a more sane teaching of economic theory in academia and in government, internationally and locally (as teaching of economics has mostly been captured by flawed neoclassical economics), and holding it to a higher scientific standard, will be important going forward, but that's all very much up in the air at the moment.