Housing Bubbles vs. Interest Rates

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joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Housing Bubbles vs. Interest Rates

This is a link to Dutch home prices falling rapidly.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aOrLBJ1TNreY&refer=home

Now, I'm a bit confused. I was under the impression that for the most part, the Alan Greenspan 1% interest rates lead to the housing bubble, with ARM's close behind. I keep reading how countries like Great Birtain, Spain, Ireland, Australia and even Canada now all have real estate bubbles that are deflating. Yet, their interest rates were always higher than ours, somewhere around 4-5%. I think Australia's was 7%. So do interest rates need to be jacked up to Paul Volker levels to prevent housing bubbles?

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Re: Housing Bubbles vs. Interest Rates

yes

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: Housing Bubbles vs. Interest Rates

Something much better would be to leave the interest rates alone: abolish the Federal Reserve and repeal the legal tender laws; that would give economic freedom to people and would make the currency a legitimate store of value. That would do away with inflation also. Instability in the interest rate structure is one of the most destructive things; it is terrible for the productive sector and nurtures massive financial sectors specialized in gambling while adding nothing of real value to an economy.

Your puzzlement with the housing bubbles emerging simultaneously in so many places around the world is explained in Duncan's book: "The Dollar Crisis". The phenomenon is related with the US flooding the international markets with dollars (since it has a trade deficit with virtually everyone). Those dollars end up in the hands of the local central banks as high-powered money, thus increasing the local monetary base. Increased availability of credit was what fueled the bubble economic activities (including housing) around the world. To increase profits, banks are usually maxed out regarding the amount of loans they can put out, so an increase in central bank reserves translates into increased credit, even if the interest rates were not dropping.

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