Most people find economics inscrutable and boring. In reality, it’s the economists who are inscrutable; the subject matter is merely boring. Sometimes hugely useful, but boring.
So let’s talk about boring stuff - we’ll start with the difference between “cheap money” and “easy money.”
“Cheap money” is when you can pay low interest rates on the money you borrow. “Easy money” is when there are few obstacles to actually being able to borrow it. Obstacles are things such as underwriting standards and requirements for things like equity and credit ratings and collateral.
So let’s say you want to buy a house. If you can get a mortgage with no money down and spotty credit and minimal documentation of your income, that would qualify as “easy money. “
If you can get a low rate, that would qualify as “cheap money.”
For 4-5 decades ending in 2008, interest rates went up and down, but (at least in the context of the housing markets) money got steadily easier. 20% down payments became 0% down payments. Credit standards were eased to support an “ownership society.” Income became more and more loosely defined and less and less documented. Not surprisingly, housing markets soared, and when they did, they created paper equity that further fueled the growth.
In 2008, this trend reversed. Fannie Mae and Freddie Mac went into receivership. Pundits found that people without equity in their homes were more likely to mail in the keys and walk away. Analysts discovered that people with low credit ratings often weren’t good credit risks. Journalists discovered that people sometimes lied about their income. Banks rediscovered underwriting standards. Easy money became a fond memory.
Policymakers responded to these unpleasant epiphanies by blaming the banks and Wall Street and muttering darkly about predatory lending, but it was difficult to argue that money should be easier.
The Federal Reserve responded to the sudden lack of easy money by providing gobs of cheap money. This meant that if you could come up with the 20% downpayment and could thoroughly document your solid income and had a good credit score, you could get a really cheap mortgage. Unfortunately, if you were one of the other 80% of the population, you just didn’t qualify. Since a high percentage of homeowners were sitting on negative equity in their current homes, the percentage of have-nots was even higher than normal.
When cheap money didn’t solve the problem caused by lack of easy money, the Fed made it still cheaper. For all the same reasons, it still had no effect, and the zero bound on interest rates finally forced the Fed to stop trying to help.
So what have we learned?
1. Cheap money is no substitute for easy money.
2. When governments mess with markets, by doing things like promoting homeownership, they risk unintended consequences.
3. The credit cycle is alive and well, and unable to be repealed by government action or wishful thinking.
4. Greenspan’s Fed had a lot to do with “cheap money” but very little to do with “easy money.”
4. Markets are self-regulating in that they do correct. Unfortunately if they are irrationally exuberant for long enough, the correction can be extremely painful and take a long time to resolve.
to be updated extensively with some useful statistics and links and to better make the case… this is stream of consciousness for now..