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Comment by jpmattia | Hacker News Reader

> but it seems to me that home owners like myself compete with each other to bid up the price of property

That seems like a side effect of the global crash in interest rates: People buying homes with cash are currently competing with borrowers with much less than 20% down and low interest rates.

btw, this is somewhat intended, and is the reason the Fed dropped rates to zero in the first place. If assets were not reflated, the recession would have gone much deeper. Unfortunately, "assets being reflated" means, as one example, people buying assets (homes) with cheap money.

It will be interesting as rates return to normal and the Fed starts to shrink its balance sheet later this year.

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Well, the classic model of how this should work is:

1) Economy sags, people have little demand to borrow money for investment

2) Interest rates are lowered to spur investment

3) Investment takes place, economy recovers

4) People are much hungrier to borrow money for investment, so interest rates increase

We haven't reached (4), and in addition, it should seem surprising that borrowing money to put it into real estate will help the economy to recover. Unlike investments into production, an investment into land doesn't seem to actually affect supply and demand in a way that will help the economy grow.

With debt to GDP ratios at all time highs around the world we do seem to have reached (4). But money markets aren't free markets, being effectively controlled - and distorted - by central banks. They hold interest rates low to attempt to spur investment in productive capacity. But business investments are motivated not only by interest rates (and labor market "flexibility") but by perceived demand, which, in part due to aforementioned low wage growth, stays weak. Capital and debt flows instead to bidding up asset prices.

And in case anyone asks, the fact that lending free money to banks and companies just causes that money to be paid out to the very rich is just a totally unrelated coincidence.

Completely unrelated.

> it should seem surprising that borrowing money to put it into real estate will help the economy to recover

Usually that's right. Since there were a ton of MBS (and CDO's etc) based on real estate, there was a lot of incentive for money to flow to individuals and reverse the crash.

Now that the banks have delevered, a crash in real estate would not be the systemic event it was in 2008. Of course, the bagholders would be those holding the assets.

> It will be interesting as rates return to normal and the Fed starts to shrink its balance sheet later this year.

The FED has predicted they'll do something about their amount of debt pretty much every month (except, I believe, 2 months) since 2009. Initially they were going to raise interest rates to 0.25% in 2012. They repeated that prediction, increasing the rate they were going to hike to (e.g. in 2015 the prediction was a raise to > 0.5% immediately). They finally "hiked rates"[1][2] in december 2016.

[1] With the VERY important caveat that there are no plans to reduce the balance sheet. In other words, as long as you owed billions to the fed 6 months ago, you're still lending for free to some extent. In other words, we can have an intelligent argument about whether interest rates are "really" above 0% or not.

[2] Also to be taken into account is that European, English, Japanese and Chinese interest rates are still negative. (QE = negative interest rates)

Excellent Graphic of FED predictions here: https://www.bloomberg.com/graphics/fomc-dot-plot/

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