Quote:
Originally posted by Spanky
These long term mortgage rates are set by people (not by Greenspan). The rates reflect what the mortgage traders (the market) think the future federal deficits will be. For some reason they are optimistic about future US budgets. I am no longer in these circles so I have no idea why they think that. All I can assume is that they know something we don't.
I should also point out that during the Reagan era that the markets had no confidence in the Dem congress balancing the budget or in Reagan being able to get them to pass anything close to balanced budgets. I could be wrong, but I am pretty sure they were really high in the 80s (higher than 8).
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I think this simplifies things somewhat and looks slightly to the wrong place. Bond traders look to what the likely rate of inflation will be, which is influenced by a host of factors, including both monetary and fiscal policy. In the 70s, monetary policy was inflationary. Reversal in the early 80s caused a predictable recession. Until Greenspan came in, monetary policy had generally been loose for quite some time. And until he made clear that a tight monetary policy (or a reasonable one--expanding money supply in close relationship to growth) was here to stay, we had higher bond rates because people were worried about more inflation.
Fiscal policy plays only a secondary role, especially on the long bonds (such as mortgages, which generally are treated about like 10 year bonds). The main concern is that if we run continuing deficits we will have inflation, either because there's too much money chasing too few goods or because eventually we'll have to inflate our way out of the deficit. Greenspan has, through long-term work, convinced bond investors that the latter will not happen. Until the deficit (and, more important) the debt becomes too large to make continuing that approach infeasible, people believe it, or at least think the risk of a diferent approach is quite low.
So, don't tie it to Congress any more, other than to thank them for confirming repeatedly Reagan's pick for Chairman of the Fed.
