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notes on credit costraints :our private bank system as menace part 127

  the limits of credit policy

and its dangers ....



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of course there was the fantasy that likes to return in good times

that mrerely raising and lowering the policy interest rate 

can keep an economy on an steady  develpoment

 income share stable

  level price  exspansion path 

all things from one up or down control dial 

but whats really up ...and down here



----------------

first off just by letting the policy rate fall to zero

the fed can set of a spira; in lot values or stock values

you can start a boom in these areas anytime you want  

one which is a function of asset purchase spec borrowers 

having to internal constraint

as the inevitable general  asset  appreciation

validates

their purchase

  as it becomes

an upwardly mobile

ever replenishing  credit availibility mechanism 

households are rteally only degenerate unliberated versions of this ultimate 

spec spiraler 

theyve gotta borrow 

so in many cases 

they'll only stop when their  stopped

by an income to debt service ratio

thats set as a  constraint by the lender 

the story of course today is

the systems originators

 found areas of satisfactory  fees

and ultimate  pooled fund lenders

  satisfactory rates 

that kept dropping the total cost of  borrowing 

and assets prices ie lots higher and higher 

while ...etc etc till the punch bowl gets fully emptied 

householders

seeing their homes earning em more money each nmonth in appreciation then their second or third job income stream ....

well wow 

they'd  borrow in this loop

till they go to infinity 

or have to start to make principle payments 

these contraints 

which themselves obviously can be changed 

AND ARE CHANGED 

can effect the market for the relevant assets 

ie household cash flow to debt service ratio 

can be changed 

even if mortgage rates don't moove

price change rates 

on houses

 and actual  rates of sale  of houses

can  be altered obviously by ration guidelines 

being manipulated 

 

 policy rate change effect deminished by other forces

the long rates may not move as the short policy rate moves

because of other forces that might add to or reduce the policy rates effect 

the flood of funds into the securitized mortasgae refi market

esssentially nullified the impact of the policy rate increase for several years worth of  slow hikes

housing market soft landing 

can be contrasted withj

the commercial real estate pop of 89 

when developers hit the  nyet wall 

  

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 results thus will vary

with  other conditions

--------------------



in case of asset lending

(mortgage on house)

ratio of debt to asset value 

and in asset purchase

related down payment amounts 

and ratios to sale price 

 interest rate per period

fixed or variable 

 # pay out  periods

for 

principle 

its pay back structure etc etc 

on and on

  but all subject to change

but once this is in place 

the interest rate cost of funds

will set upper bounds on the borrowable amount 

and thus indirectly  a  price ceiling on purchases 

in dedicated asset purchases 

the household faces 

and a credit budget limit on other household purchases 

if your card company

has a rule your card limit

is say 1/10 of monthly household income 

the rising or falling periodic rate 

will cause a line



------------------------------------

 the key point

this  mode of the credit system 

is not demand driven

demand always exceeds supply

like the jobs market 



these are constrained borrowers

they would borrow more if they could 

like my paine's outfit

they only stop when they're stopped

like  cock eyed gamblers 

limit  change 

and its when you look at the borrowing of firms 

that you see the real deal

in a crisis those who can borrow to incresae investments don't because of weak demand

and those who would borrow to keep going

are cut off as too risky and unworhy 

the key

  defaults  may exceed the reward 

of higher rates to lenders  

but they don't wait to base it on experience

they pre empt in a discontinuous flip to the off switch

and the call  in buzzer 

firms have no safety net of restraints on lenders



imagine if banks could call

 household mortgages 

if they felt they saw excessive risk 

Posted by lady eve at July 26, 2006 02:00 PM

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