Cheap Credit

Although I believe that the long end of the curve will eventually higher, I’m beginning to think that interest rates do not actually have to move higher in order to bring housing prices down. It seems possible that inflation can continue to remain tame but that overall economic growth could slow or go into a recession. Even though interest rates might still stay low, like in Japan, demand for real estate could actually fall as people get laid off and pay checks shrink.


[“Call it cheap credit's revenge. We seem to have arrived at the curious juncture where the low interest rates that rescued us from the last recession might be the cause of the next – or, at any rate, might be the cause of some serious economic or financial unpleasantness. It turns out (not surprisingly) that cheap credit, when continued too long, inspires suspect and speculative borrowing. It becomes a formula for its own undoing.

William Rhodes, senior vice chairman of Citigroup, puts it this way: "The speculation here is more evident than people seem to realize. ... I've seen this movie (before)." The script is familiar. Too much cheap credit induces overborrowing. During the borrowing phase, the economy seems to do fine. But sooner or later, the prices of things bought on credit rise to artificially high levels. Prices stop rising – and perhaps crash. Lenders and borrowers suffer losses. Their spending slows or declines, dragging down the economy.”]