I really do not understand!!!:(

[Biscuit]

Hi all



I am old enough to have been involved as a house owner in the 1989 recession. I recently noticed a mortgage statement declaring 14% interest rates at that time.


I am hoping someone with an economic brain can explain why when there was negative equity, house prices falling and a general recession house interest rates rose to 14% whereas presently we seem to have negative equity because house prices are falling (especially with the sub prime) and a general (huge) recession but interest rates are dropping rather than rising. I am obviously missing a part of the picture and would really appreciate if someone could explain it to me so I understand. Have just watched last weeks despatches "why the banks failed" and will be watching part two tomorrow.



I know we are all busy puzzling but wonder if someone might understand what is happening and could spare the time for a quick explanation to someone who does not.



Regards



Paula/Biscuit

I hope you like the picture of Biscuit who is our very friendly cat.

[Bunnylump]

I'm not ignoring your question, Biscuit, I just don't know the answer. I'm generally very clueless when it comes to finance type things. I would think it is because the recession has been caused by different factors to start with. >EDIT< I did have a long and rambling piece of waffle in here which didn't make sense anyway.Basically I don't know.

[Scurra]

Well, here's the easy version:

The mortgage interest rate has nothing whatsoever to do with the value of a house.



I realise that isn't a terribly useful answe, but, short of a long report by Robert Peston, I can't really think of any other way to summarize it. In essence, you are drawing a faulty conclusion in thinking that the base rate of the Bank of England (which is what mortgage rates are based upon) has anything to do with house prices. It is mostly to do with trying to control inflation and to create growth within the economy*, and sometimes this has strange side-effects, such as the one you cite.

*we'll gloss over the fact that creating growth in the economy is partly what led to the whole mess in the first place,

[Bunnylump]

Yeah. What he said.

Mind you, even though I am totally clueless with anything to do with finance, I have been saying for several years that I couldn't see how the banks could sustain such a ridiculous level of lending, and how people could continue getting further and further into risky debt without it all going pear shaped. And if I could see that, why couldn't all these highly paid economists and bankers? It's just common sense if you ask me.

And while I'm on my "told you so" high horse, I will also say for the record that it worries me that so much of our economy is based on the tertiary sector. What ever happened to making stuff??

>Climbs back down off soap box<

[Biscuit]

I agree with you so much. I work in the manufacturing sector - we actual manufacture furniture for the education market and I think we should encourage manufacturing (well I would being in the sector).

Thank you everyone for telling me that interest rates are not dependant so do I presume as inflation is falling that is why the interest rate go down rather than up. ie last time they were trying to stop us from spending as the economy was inflating and this time they are trying to encourage us to spend as the economy is deflating and that is why they are manipulating the interest rates in a different way.

Is that right?

Paula

[clvrlad]

What ever happened to making stuff??

jonny foreigner decided to make them cheaper even after they factored in transporting them here.....


for example the £2000 car thing is useless

for cars that £2000 would be a significant price change (ie the cheaper ones) we dont make them so it wont increase production.

unlike germany who allready do something similar but they do make the right kind of cars so the "discount" here will only increase the prices of the cheaper cars
you cant tell me car sales men wont add £'s on to get their share of the money


>also gets off the soap box<

[LAT]

In 1989 they were trying to protect the pound in the ERM (exchange rate mechanism- before the days of the Euro). People were selling sterling, so to make it more attractive exchange rates rose. This was a problem particularly in our country.
Now the problem is worldwide. Interest rates are being lowered to try to encourage more people to spend. House prices are falling because no-one is buying.
The banks have caused the problem by lending money to bad risks and also by dealing in derivatives (which nobody really understands - not even the bankers probably)

This is a summary of what my OH told me when I read out your message to him

PS - beautiful cat!

[Scurra]

The banks have caused the problem by lending money to bad risks and also by dealing in derivatives (which nobody really understands - not even the bankers probably)

Much as I don't like to defend the bankers here, that's not entirely true. Yes they were lending to "bad risks" but the problem was really caused by the guys who realised that they could disguise these bad risks by mixing them up with "good risks". And the original incentive for lending to the "bad risks" was actually based on perfectly sound expectations; yes, the default rate would be higher, but not so much higher than it made them impossible to justify. (And in any event, "negative equity" is a massively misleading concept. It is only relevant if you bought a house as an asset. Most people aren't doing that. They are buying them to live in!)

And that's the new scandal that will probably break later this year. You see, the thing is that those "good risks" are still "good risks". But because of the whole credit rating business, the bundles that contain these good risks aren't considered to be "triple A". And the big investors - mostly pension funds and the like - are basically barred from buying anything that isn't "triple A". But the little (still unregulated) investment companies don't have those restrictions. So they are now making a new killing by buying up these bargain-basement deals (that are being dumped because of bankruptcies) where the "bad risk" is massively outweighed by the low price of the "good risk"...

I wish I was making this up.

[MBH]

I keep seeing this phrase about encouraging US to spend..... spend WHAT? I'm seeing less spendable money each year. I don't know how long it is going to take to 'catch up' with the extra spend from the fuel rises last year (and they seem to be on their way up again

It seems as if we are being asked to get into even more personal debt to 'help the country' to get back on it's feet. As for reducing VAT by 2.5% Did anyone notice the difference?

[clvrlad]

As for reducing VAT by 2.5% Did anyone notice the difference?

only cos all the prices on the shelves were the old ones so i was trying to pay a few pence more for stuff....

yes i know what im spending when i go to the till and yes i usually try to give the right money

[Bunnylump]

No. And I wish they hadn't done that. It'll all have to be paid for in the future. I'd love to be able to spend more, but unless I get myself into debt I can' t do that. So I'm just making do and mending! (Mental note: MUST learn how to darn). I'm even trying the "growing my own veg" thing this year.

[clvrlad]

(Mental note: MUST learn how to darn)

just keep doing scurra's puzzles you'll be darn!!"ing" like the rest of us pretty quick

[Cenwulf]

Here are the main problems:
a) Interest rates are at an all time low
b) People are losing their jobs or having to take a pay cut
c) Prices are on an upward trend even though inflation is decreasing
d) The banks are in a mess after the sub-prime mortgages fiasco and are reluctant to lend to people

Consequently people have less money to spend*. How can the economy get kick-stated if there's nothing with which to kick?

The 'quantitative easing' won't work if the money goes to the banks, as they won't lend to each other, let alone to the general public.
The money should have gone direct to the people, to use however they wished!

*with the exception of politicians, bankers and Sir Fred Goodwin, of course...

[Bunnylump]

Well I'm definitely in agreement with that one!!

And no, Clvrlad, I haven't just learned to darn because of Scurra's puzzles. I have learned a whole new range of swear words. Real, proper, big ones.

[MBH]

Hear Hear

[Scurra]

Would you like the five-minute argument or the full half-hour?

Whilst your points a and b are factually accurate (if not entirely helpful), point c is next to useless (because the term "prices" encompasses everything and the prices of different things work in very different ways) and point d is questionable (as noted in my previous posts.)

But if you think that just giving money to people would help address any of those points, then I've got this bridge you might like to buy... (Not that I'm saying that giving it to the banks without preconditions is sensible either.|

[MBH]

PuzzleBrain Members for Government - the current mob can't solve this puzzle so give US a go.

[Bunnylump]

But can you imagine Scurra, Cenwulf and Brian having a face off in the houses of Parliament?? We'd need some pretty hefty bouncers. Hey, I could do that job!

[Cenwulf]

Vote for the Puzzlebrains Party - you know it makes sense... eventually.

[Bunnylump]

I'm only coming if there is jelly.