Given the events of the past couple of months, interest, money, and the future of asset allocation is beginning to change. To better understand the conditions we see today, we must go back to the extension of the Housing and Community Act of 1992 which incentivized banks to come up with innovative ways to make houses more affordable to vulnerable populations. The banks responded by popularizing mortgage-backed securities (MBS), which created a massive housing bubble that ended pretty badly as we all remember. During the financial crisis, the Federal Reserve sought to lower interest rates, increase the money supply, extended its discount window program to central banks, and bailed out other banks in a desperate effort to flood the economy with the currency that was needed to quickly re-start the economy. But why? You see, neo-classical economics and monetary theory agreed that lowering the Federal discount rate should promote more borrowing from central banks, which then should have made it easier for private banks to borrow money from central banks, which they could then use to lend to companies at lower interest rates.
From the chart above, we can clearly see how lowering interest rates increased the money supply, and thus should increase the demand for money in the short-run. As the demand for money increases, an increase in investments should follow. Unfortunately, this also implies that inflation levels should have risen as we trade off growth for inflation. Given the amount of money put into the system, we can clearly see that this theory started to work flawlessly during the beginning of 2008 and thus, the economy should have recovered quickly after that. As this happened, the banks began to borrow enormous amounts of money, and the market speculated that higher levels of inflation were soon to follow.
After 2008, many people feared that such a massive increase in the money supply would create rapid amounts of inflation as more businesses borrowed cheap money at the same time that interest rates were reaching zero. The idea at the time was that this enormous sum of money would create growth in the US economy, which would translate into more jobs, but also more inflation. As time went by, nobody could explain why the U6 and U3 unemployment rate decreased as inflation remained flat, despite all of that money that was added to the economy. In 2008, some investor’s even feared hyperinflation as they thought the economy was going to be overstimulated. When inflation didn’t reach the target of 2% year after year, the market knew something had gone terribly wrong.
What Happened?
Although many argue that inflation didn’t surge in the US economy because of anemic growth and over-regulation, that’s only part of the story. Let’s remember that the money demand theory promised an increase in money supply (that did happen), along with an increase in money supply and demand for money as interest rates decreased. It never promised that this effect would occur in the real economy. You see, the assumption was that the money put into the banking system would quickly enter the real economy and spur inflation. Instead, a lot of that money was never loaned while some went into wall street. However, this doesn’t mean that theory was incorrect, after all, there were a lot of rules and constant changing regulations that prevented this money from being lent out, the biggest being the Dodd-Frank Act of 2010.
If you look at the money demand theory from an investor’s perspective, it signals that bonds were going to get pricier as rates went down since there’s an inverse relationship between price and interest rates. For example, as interest rates go down, the price of bonds go up. As a result, lower interest rates increased the price of bonds. Since Bonds and Stocks are often held in portfolios and measured against risk, if the value of bonds diminishes due to an increase in price, then it’s only natural for investors to switch to stocks as they seek to maximize their utility. This should have created a surge in the stock market as we moved from point A to point B, and it did.
In order to better understand why this happens, we can look at the Security Market Line (SML) that explains that for every unit of expected return, investors incur an extra unit of risk according to Efficient Market Hypothesis (EMH). Why would investors take on more risk? Because they have to invest in assets that are correctly valued, taking into account opportunity cost, risk, and total returns.
In summary, not only can old theories be used to explain Ben Bernanke’s plan to restore the economy after 2008, but there’s also significant proof that it did work to some degree. There was admittedly inflation in the stock market if we define inflation as a rise in prices only accompanied by lower value of those assets. The evidence can be seen by higher than expected P/E ratios which signals overvaluation of stocks as investors pay more for earnings. As we all know, money has to travel somewhere once it reaches a market, and it seems that a lot of that money went into the stock market and never reached the real economy, which is known as Financialization. This also implies that the real reason why the economy recovered very slowly (if at all) was because it never got any real help.
Now what?
Since we are now entering a world of higher interest rates and inflation, it is only obvious to think that Bonds will start to become more attractive again. However, that doesn’t mean that the stock market will go down or crash, it only means that returns on an annual basis will be lower compared to periods of lower interest rates. As we shift from B to A, it will be important to remember that major stock indexes such as the S&P 500 will not perform as well when compared to lower interest rate periods. As always, some industries will outperform the market.
References:
- Flynn McConnell Brue Microeconomics [Book]. – New York : McGraw Hill, 2015. – Vol. 20.
- Mankiw N. Gregory Principles of Macroeconomics [Book]. – Stamford : Cengage Learning, 2015.
- Nicholson Walter Microeconomic Theory [Book]. – Willard : Thomson South-Western, 2005. – Vol. 9.
Very interesting information about the 2008 housing downfall and a lot of unemployment. Investors are always looking for a way to make money even if sometimes they are taking risks. A lot of banks lend money to home buyers that did not met the criteria to buy a house. I even remember people buying houses with out a social security number which says they don’t even have a credit score. People were buying houses not even having the money to pay for them. I think that the government should put more stricter regulations with big corporations. I also believe that because of this there was a lot of corruption and big executives were getting richer. Just look at what is going on right now with sean Hannity he made millions buying real estate foreclosures in 2008-2010 with the help of Micheal Cohen. Finally I hope that the government does help the american people by passing stricter laws regarding lending and borrowing money because at the end we are the ones that suffer the most.
At the beginning of 2001, there was a big boom in the US real estate market, fueling the rush of people to buy real estate, even though they were not able to do so at that time, which encouraged banks to offer high risk loans.Many lending institutions have provided huge loans to real estate and construction companies, to maximize profits. Since the banks sell the loans between them, once the borrower collapses, until the bank collapses, the bank that lent the first bank collapses, and the first floor collapses naturally, the rest of the floors will collapse gradually.
In my opinion what made it worst is people start to get loan to pay another loan with higher interest. the best is to let market heals itself without government intervention.
While reading the article, it is obvious that money, interest, and the future of asset allocation has been changing for the past few months. I find the first chart really helpful, because it shows how lowering interest rates increases the money supply. It is logical that this situation would also increase the demand for money. When the economic crisis happened in 2008, I think that many people did not know what was going to be. However, the most expected scenario was probably that a huge increase in money supply would start a fast inflation. Like I understand from the article, the main idea at that time was that a big amount of money borrowed by different businesses would make a growth in the US economy. In this case, there will be more new jobs created that would also lead to a bigger inflation. I personally think that government should hire a team of professional economists who would be able to analyze and predict the market. I believe it would help to avoid any possible economic crises in the future.
I found the article interesting on how you explained and provided evidence on how Bernanke’s plan did find some degree of success. By lowering interest rates there was more of a demand for money but, not all of the banks were able to lend it out due to changing rules and regulations. It would have been interesting to see how big of an impact his plan could have had if the banks were able to lend more money out to firms.
After reading this article I agree that the current financial crisis has made it agonizingly clear that there is a requirement for better control of the capital market. The supposition that the market can revise itself and augment societal riches is currently being truly tested. Be that as it may, shockingly, in the field of work showcase, the supposition of unbridled adaptability as an ideal course of action still appears to appreciate far reaching support, particularly among global advancement offices. Truth be told, it isn’t hard to discover calls to improve work showcase adaptability, which means cuts in wages and business conditions, so as to address miserable occupation circumstance and rising joblessness levels. For instance, a recent OECD working paper argued, “More flexible labour markets will be a key adjustment mechanism during the recession as well as in the medium term…”
This also seems to be the policy advice of the World Bank. While the Bank recommended here and now strategies to balance out business and salary, it keeps up that “excessively stringent work assurance laws compel firm procuring and prompt imperfect level of business, an element especially imperative amid monetary downturns.
It’s crazy how we’ve studied the economy for centuries and still come across variables and equations that result in catastrophic economic failures without any warning. It shows how the economy is always changing and there are new factors coming into the equation that we just have to make educated guesses on in an attempt to keep the economy stimulated at a steady growth without failure or over expansion. This article shows that everyone involved in the market crash of 2007 was ignorant to the effects that they were causing upon the economy. Even big banks and the top economists can be wrong when it comes to dealing with these factors. We still have a lot to learn.
The idea of lowering interest rates in order to increase the money supply has been a brilliant idea for years. But as all economist know and fear nothing good last forever. Lowering interest rate did indeed increased the money supply but at the cost of rapid inflation. Once interest rates are lowered, more people would begin to take out more loans at a cheaper price. When more money is out there most would assume that in circles back to the economy when it actually goes to wall street ending with a few problems.// I really like the fifth chart where it explains the relationship between the s&p 500 and bonds, one can clearly see how there’s an inverse relation between the both as the treasury rate was lowered the return from the s&p 500 became greater…etc
Paying close attention to the article one can just simply agree with the fact on how and why Ben Bernanke’s plan did work and at the same time it was not all perfect.
The source of the 2008 financial crisis was strictly due to banks. Low-interest rates, giving out free loans, and the credit history of a person receiving these “deals” didn’t matter. In the short-run, this idea worked, but in the end, it all came crashing down. These Mortgage Based Securities was none other than a profit opportunity by banks.
Hyperinflation or another major crash in the stock market seems unlikely but possible. The article does a good job at emphasizing lower numbers overall for asset returns (but not a decrease) within the stock market (like cash returns).
I also want to add that Financialization is a major problem within economics due to the poor allocation of money. The article itself mentions how financialization is the implication of a slow recovery for the economy. A question that sat with me throughout this article is; If a larger portion of the country’s capital goes into financialization, won’t the allocation of money be less available? Won’t this be a problem?
The United States economy suffered heavily as a result of the inappropriate and negligent actions of the nations leading bankers. Incredibly it was the public who suffered the damage done while those at fault were bailed out in attempt to lessen the damage however possible. While the economic downturn did subside, the the issue of Financialization continues to affect the American people. Unfortunately because of the gluttony of money forced into the market, the money flow through the economy is stagnant. This of course impacts almost everyone in the country, and the lack of spending is only a negative. The over-investing of the market also sets up many for failure. The increased amount of money in stocks far beyond their value could lead to another major economic downturn if some of those companies begin to falter. As seen recently with Facebook, even the biggest most popular brands can take huge, sudden hits. If companies like Amazon or Apple face similar adverse conditions, the results could be devastating.
The housing market crashed around 10 years ago because the banks were just giving out loans to anyone who came in and wanted to purchase a home, there were people buying homes that were not even qualified to a buy a home at the time. the theory was not completely wrong but due to changes in rules and regulations, it made it that much harder for the money to get lent out to the public. i believe sometimes we should let the market heal itself because we could be causing the crash trying to help it.
I believe banks had the right idea to make houses more affordable at the time, but they did not look at the long or short term consequence as many people rushed to buy houses with loans although interest rates were said to be lower. Fear of inflation of an overstimulated market got the better over many individuals, people started putting most of their money into the stock market. As Money supply was increasing, people wanted to maximize profits and they saw profits in the stock market. This was a mistake because money was not flowing throughout the economy but only through the stock market which led to a slow recovering economy.
It is bad policy that lead the housing market to crash around 10 years ago. Neo-classical, Keynesian economics or monetary theory are logical, but they do not always work or work partially. I mean there are too much factor or externalities that can impact those theory. I think one of the biggest factor which are unpredictable is how human is going to react. For example the bankers carelessly taking advantage of a bad policy led to the crisis 10 years ago. The financialization was the reason why the economy recovered very slowly. I read another article (The financialization of the economy hurts manufacturing) where Collins Michael say that Financialization is about making money from money; it has nothing to do with creating jobs or shared prosperity and, as a result, it has had a devastating effect on manufacturing. I understand that if the money had reached the real economy, more jobs would have been created leading to the rise inflation and the economy growth in the U.S.
Hyperinflation occurs when the price of goods and services rise more than 50 percent a month. It is caused by the government printing money to pay for spending. Thus the money supply is increased causing inflation. The severity of price increases distinguishes it from the other types of inflation.
Winners in hyperinflation are debtors and exporters. Debtors win because higher prices make their debt worthless. Exporters win because the falling value of local currency makes exports cheaper compared to foreign competition.
The Federal Reserve prevents hyperinflation in America with monetary policy. Their primary job is to control inflation while avoiding a recession. This is done by relaxing the money supply, which is the amount of money allowed into the market. Tightening the money supply reduces the risk of inflation while loosening it increases the risk of inflation.
The only time the United States suffered hyperinflation was during the Civil War. Money was printed to pay for the war. Hyperinflation erodes the value of currency and renders it worthless. It makes a bartering system necessary when money is useless.
After reading this let’s remember that the money demand theory promised an increase in money supply (that did happen), along with an increase in money supply and demand for money as interest rates decreased. You see, the assumption was that the money put into the banking system would quickly enter the real economy and spur inflation. However, this doesn’t mean that theory was incorrect, after all, there were a lot of rules and constant changing regulations that prevented this money from being lent out, the biggest being the Dodd-Frank Act of 2010. It never promised that this effect would occur in the real. We can clearly see how lowering interest rates increased the money supply, and thus should increase the demand for money in the short-run. As the demand for money increases, an increase in investments should follow. As this happened, the banks began to borrow enormous amounts of money, and the market speculated that higher levels of inflation were soon to follow. Unfortunately, this also implies that inflation levels should have risen as we trade off growth for inflation.
Economy theories have been developed, studied and tested in the short and long runs as well as in small and large scales, and yet they do not always apply entirely or as completely as expected. This statement implies that sometimes predictions, and any mitigating, controlling or advancing actions taken from these, can be both prudent and not feasible, but you cannot truly see the consequences until they are occurring. Certain factors and externalities, as well as human reactions even by expert individuals and regulating agencies, can easily impact the economy. In retrospective is when economists can more accurately evaluate and follow the cause and effect of market actions and behaviors, but even that does not always help make correct educated guesses in future instances. So as this article defines, the current changing environment can be understood by looking back at previous financial crisis, its low interest rates, increased money supply, stock market upsurge and start of inflation, and see the logical happenings and where it went wrong. The recovering economy is still feeling the crash, but could something have been done differently? The responses were rational and the arguments compelling, but fear of risk and desire to maximize profit saw the better of the situation. Presently, the economic world may seem to be heading towards inflation but it does not necessarily mean a crisis will follow, just that some of the same historic responses may be seen. Still, as always, people will be powerfully motivated to maximize profit where they can.
After reading this article, I think history did not repeat itself in 2008 as it did in 1992 mostly because the economy now in todays time is far more complex. Maybe in the beginning of the new economic era in 2008. But, as you said, assets were allocated differently than before, and no matter where they were allocated, a big sum of money never truly reached the market. In now a days in 2018, we now have a whole new form of an asset which is a crypto currency called “Bitcoin”. It really makes me wonder how online assets will change the overall economy, and effect our market. in 2008 the online currency “Bitcoin” was created, but the value has increased over 1000% within the last year. The more people that invest on this online currency, the more money we lose in the market. This article was definitely interesting, it made me think of questions that were keeping me to want and answer them.
In my view When the demand for houses grows up people start up building houses close to the urban center and due to city restriction on each and every state the city does not grow outward but grows higher( building the skyscraper.) Most of the city has local laws regarding the pasture lands, as they cannot be used for settlement for city growth limit and beside environmental protection. This helped to raise the Housing price constantly.The Housing and Community Act of 1992 made bank come up with different schemes which were helping to get houses to the people at the cheaper price. Every Human has the greed of being rich. The homeowners want to get rich by flipping real state.Banks were trying to get more people with whom they can max loan their volume and get more of the people home. Mortgage originators were trying hard to get max loans legally. Due to MBS on the low-interest rate many people with bad credit get loaned for the housing. How can the bank be that sure to provide a house to a person who can hardly pay? Greed is bad when its taken to next level and that what lead to the crisis in 2008
The crisis is over by following Ben Bernanke’s plan. The inflation did not go up as it was supposed to be because some of the money ends up at Wall Street. Finally, the main motto I found in this article is “Money attracts Money”
In my opinion, I believe the intention of the federal reserve was to help low income people capable of affording homes, but as a result they weren’t able to afford the payments. The stock market is constantly changing as well as the theories. Buying homes are one of the most costly investments we make in life, so in a sense I agree with the thought that changing stocks would increase a demand in money. However, banks made risky loans and were not capable of getting that money back. I kinda wonder if people were hesitant to the plan or if they were consumed by the idea of owning a home. Also, I wonder what the marginal gap is between the average income versus prices of houses purchased.
I was around 9 years old when the financial crisis occurred. At the time I really was not aware of what was happening I just knew it was not something good. Now as an adult I understand that the financial crisis was bad, but even now I am still learning new things about the financial crisis. Just reading this article I learned new things I did not know before. There are some things I do not understand. Like why were there so many regulations for banks loaning out money? If they were already loaning out money to people who had a high chance of not paying back, which was super risky, why have so many regulations if banks were already taking a very high risk? I also feel like the government did not do much to help the economy, I feel like they could have done more, like why did they put so many regulations? because of these regulations banks were not loaning out the money, and wall street was getting the money. I feel like partly because of this, the theory did not give the results they expected, it only gave a little false hope since part of the theory worked. its upsetting how the money never reached the real economy, and it only went through the stock market, I feel like this was a big issue too, because people expected the money to flow into the real economy.
This article explains why the US economy took so long to recover to the financial crisis in 2008. In an attempt to restart the economy, the Federal Reserve wanted to lower interest rates, increase the money supply, and bail out banks in hopes that their efforts would flood the economy with currency and restart it. Towards the beginning of 2008, their theory worked very well. As interest rates were being lowered, the banks were beginning to borrow large amounts of money. This led to many people worrying that such a large increase in the supply of money would eventually lead to very much higher rates of inflation. However, the rates of inflation did not rapidly increase like many people suspected, which led many people to believe that something had gone wrong. This article explores the explanation that the rates of inflation remained low because much of the money went into the stock market and never ended up reaching the real economy. The conclusion being that the economy recovered so slowly because it never actually got any help. I found this article to be a real insight into what happened after the financial crisis because I had never fully understood why things ended up being the way that they were. I found it very interesting and a little bit upsetting that, because banks were wary of lending out the money, so much progress was inhibited in fixing the economy.
The article interest, money and the future of asset allocation can be best understood when we reflect on the massive housing bubble that ended badly. In honoring the housing and community act of 1992 to make houses more affordable to vulnerable citizens, the federal reserve ended up lowering the interest rate and increase the money flow. This in part was done to revitalize and restart the economy, borrowing was made easier for private banks from central bank and private citizens can easily borrow from private banks. The increase of money flow into the economy resulted in inflation and all the money put into the banking system was never loaned to the private citizens, some even went into the wall street. Theoretically this was a great idea by the federal reserve but things didn’t go well in the implementation, the government ended up bailing the banks and it was a costly endeavor for the US government.
All in all, I think there are many theories that can be used to rebuild the economy in times of financial turmoil. Ben Bernanke’s plan to rebuild the economy after the recession wasn’t completely as successful as planned, but it did work to some degree. With the older economic theories, it was believed that lowering interest rates would increase the money supply and in turn would stimulate banks to lend more money, overall improving the economy. However even though things look good on paper, they are rarely as successful when implemented in real life. The economy from what I have seen is a very inconsistent system that has the ability to fluctuate in extreme directions with very little notice. I believe that over time things eventually iron themselves out and theories regarding rebuilding the economy do work out for the better and do allow us to prosper as a nation.
In the impact on 2008, I just had arrived in America and literally didn’t even have an idea of all of this going on.I believe starting with having to increase the money supply was a great idea for a minimal years but we all know it was only temporarily, where more Americans would take out loans for a cheaper rate as the first chart shows, that in just a matter of time there will be demand for money if the interest rate were lowered. The only mistake we didn’t all see coming is that money wasn’t flowing through the economy at a fast pace but only through the stock market which showed a slow recovering in the economy. The main overall intention was to recover financially making the money flow with currency but knowing well enough that banks would be out of debt and lowered interest rate would make people get houses for a lower rate at the end it didn’t work so people and banks started realizing it was working and they were worried about their loans. In conclusion, nobody knew at the moment knew why the money was never to reach the real economy at the right time.
After reading this article that is really interesting in regards the interest rates, money supply and the future of asset allocation. I believe that is was a good idea that interest rates where lowered that way money supply increase and was be able to be lent out. But a lot of rules and constant regulations prevented for money to being lent out. Investors were able to borrow money at lowered interest rate but in some cases it was hard to be paid back.
Back in the day the government decided it needed to help people by houses; they made it easy to get a mortgage. As time went on, it became easier and easier to where people were borrowing so much money and were unable to pay for their homes. The banks then went into debt and they began to take back the houses from the people. The bubble of house valuation collapsed when the economy collapsed. If you have an asset you have to protect it and not let it become overvalued or overexposed to exploitation and potentially collapse. If you make it too easy to borrow money, more people will borrow and then the economy heats up too quickly. They therefore have to start making it more difficult to borrow money again. You have to control the money supply, if you lower the interest rate you increase the money supply which causes the danger of hyperinflation. You then have to put the financial brakes on and increase the interest rate to cool the economy down. The banks used money they were gifted to pay off their own debt to keep themselves afloat, instead of putting the money back into the economy. That, in combination with the Dodd-Frank Act, stifled the economy. In principle, the concept was correct.
In my opinion, the idea of lowering the interest rate, followed by the consequential money oversupply harmed the economy more than it did any good. The inflation rates, as of 2008 encountered extreme peaks (positively and negatively). The idea of recovering the economy should have been based on attracting investors rather than flowing the market with money, as it runs through the risk of hyperinflation. Despite the market support that was observed in the short-run, it was not the optimal method for the long run. Furthermore, the sharp fluctuation of inflation that occurred in the following years was largely influenced by the lowering of the interest rate. Moreover, lowering the stocks prices does not necessarily indicate an increase in their value; it will push off the investors to avoid the risk that is involved in a further lower price,
Well yes this makes senses. How would you expect the economy to grow if the money intended to go into the economy was never even used in the economy, but into the stock market. So, since there is an inverse correlation between stocks and bonds then according to the provided information it only makes sense that Bonds would be more attractive in the near future. Now my question is what would have happened if the money provided did go into the economy and the U.S had hit an inflation rate of 2% or higher? Where would we be at today? Would Stocks be more proposed into the future instead of Bonds?
Financial and investment decisions are made using economic predictions. But the only basis for such predictions is the data accumulated from historic happenings. As with everything else in life, people attempt to identify and make sense of patterns, such as the inverse relationship between bond prices and interest rates. Really thee is no perfect model or means of prediction on how the economy will behave. As the author of this article points out, some historic events have proven previous models wrong and forced us to reanalyze how different factors work together. Despite having no real control group, there are factors consistently used in economic analysis—most notably interest rates. By extensions inflation is used as a sort of symptom based economic diagnostic tool. It’s amazing how much our world depends on such things in order to maintain a stable living environment. Really inflation will never be eliminated and the national debt will never go away. It is our only true economic constant.
I still agree with my previous post on this subject. I agree that in theory the correct actions taken by the Federal Reserve were to lower the interest rate and to increase the money supply as a short-term solution until the economy starts to recover on its own. The problem is that the banks found way to invest the money instead of releasing it into the real economy. I am not sure if they did this because they were trying to find better investments than what they were doing before the collapse or not. A lot of banks did go under during the recent recession, so from a business stand point this does make since. Keep the money that you can get at a reduced rate and invest it in something that can give you a high return. The banks probably thought it was a smarter investment to just keep the money or invest in the stock market compared to making loans to individuals that might have a lower return in the long run. I do believe that there should have been better measures in place on what should happen to the increase of money. It should have had incentives to make sure that more of the money would hit the real economy faster.
This article shows how the interest rates, money, and the future of asset allocation changes. It also shows how banks handled such an event, like the 2008 recession which was not very good. The united states was affected greatly by the way bankers neglected to follow appropriate actions. The banks were able to give out mortgages to just about anyone and even those who did not qualify for a house mortgage. During this crisis, the federal reserve was trying to fix what the banks had done so badly by lowing interest rates, increasing the money supply, and extending the discount window. This recession in 2008 shows that banks have too much power over the economy and it doesn’t seem to end very well. And even though lowering the interest rates seemed like a good idea, inflation was still an effect to it. There was a panic coming up because money was not being used appropriately and wisely.
As I read this article it is easy to see that the money, interest and the future of asset allocation has differed over time. In the economic crisis, many people expected that there would be a huge inflation. This article has shown me that large amounts of money borrowed can help the economy grow also. I personally believe that the government should keep a very close watch on the economy to prevent crisis’s from happening again. I believe that there is a need to have a more stable control over the economy because a crisis will affect everyone and this can be avoided with careful watch.
The article Interest, Money, and the future of Asset Allocation attempts to explain the relationships between interest rates, money supply, inflation, asset value, unemployment, and the stock market using figures and technical reasoning. However, there are countless factors that come in to play in the real world that make this so unpredictable. For example, who could have known that the oil and gas industry would take such a hit in 2014? The price dropped by almost 50% and numerous employees that were working for oil and gas companies were laid off. As more discoveries in technology are made and researchers develop innovative solutions or alternatives to tackle global challenges in the energy sector, the world changes. All these factors have a major effect on the market. There are too many variables that come into play, which leaves us with uncertainty and why these crises tend to come upon us as a shock.
This article is articulated very well on how interest, money, and the future of asset allocation is beginning to change. It starts off by explaining the huge housing bubble that left many people homeless after the bubble burst. I agree with the article that lowering interest rates increases the money supply just like the first chart shows very clearly in the article. Sadly, the more money in the system means inflation levels rise but after the crisis of 2008 that did not happen which a lot of people feared and questioned that something was wrong just like the article states. Somebody below commented that the government should hire a team of professional economists who would be able to help analyze and predict the market, but I do not think it is that easy. There are too many variables for economists to predict everything to prevent something like the market crashing but some more government regulation might help prevent crisis’s like the housing market bubble.
After reading the article, it made me realize that the economy sometimes can be unpredictable. This article is proof that even if it looks good on paper, its not real life. Anything can happen in the real world to throw something off. For example, after the housing crisis when the government tried to get as much money into the money supply as possible, they expected inflation but it never really came like they expected. I believe the government should regulate this a lot more closely and prevent crisis’s from happening as much as possible. I am all for non- governmental regulation of some things, but when it comes to the economy and money supply, I believe the government should play a bigger part.
Lowering interest rates increases the money supply and increases the demand for money in the short run. When the need for money rises, there should be an increase in people investing their money in the economy. On the other hand, inflation levels rise since individual’s trade off growth for inflation. Recent studies show that the above theory worked in 2008 because people put a lot of money into the economy so that the latter could recover drastically. As it happened, banks increasingly leveraged by borrowing more money, which led to a market that oversaw higher inflation rates in the future that never happened. This was because there were many cutthroats that led to banks not lending out more money to characters in the economy the biggest of them being the Dodd-Frank Act of 2010.
The natural theory of money implies that the value of treasury notes and bonds increases as interest rates fall because there is an inverse relationship between interest rates and the price. In low interest rate regimes, the bond prices increase as demand rises due to the liquidity. In addition, investors enter into the equities market as they endeavor to maximize returns. The Security Market Line (SML) is the graphical representation of the capital asset pricing model. In graphic the SML, the X axis represents the risks using the beta while the y axis represents the expected returns. Investors take that excess risk because they allocate investments in assets which are valued correctly considering their risk, opportunity costs and total returns.
Overall, the concept of interest rate risk means that the prices of bonds falls as the interest rate increase, which is a sign of an inverse relationship. Therefore, some of the industries outperform the market.
This article is about Money, Interest and Future asset of allocation. it explain how interest rate, money supply, stock market, asset value use in the real world. The market is very unstable all the time up and down. Like how we have the housing market crash in 2008, i bet no one see that coming. it hurt our economy a lot, people was losing house and job everywhere.as right now we still have a very high rate of inflation and high interest rate. That wont mean that the stock market will go down or crash, it only means that returns on an annual basis will be lower compared to periods of lower interest rates
It is until now that I understand what happened back in 2008 and the purpose of so much money becoming accessible. I am interested in knowing who is behind this tactics and who are the most benefited from this type of decision. Yes, the purpose is to “make the economy grow” but who gets the bigger piece of the cake? I believe that knowledge is power and the ones who knew how to manage the system where greatly benefited back in 2008 and those people keep on seeing the results of their smart moves today. While others, in the hyped fallacy of easy, accessible money lost some or all of their assets.
I read in an article in the Financial Times, “Central banks hold a fifth of their governments’ debt,” which stated;
“Leading central banks now own a fifth of their governments’ total debt, a sign of the scale of the challenge they will face in unwinding unprecedented stimulus measures deployed over the past decade. Since the financial crisis emerged, the world’s biggest central banks have carried out large-scale purchases of bonds and other securities in a bid to boost the global economy by driving down borrowing costs for households and businesses.” https://www.ft.com/content/ae19e60e-81b0-11e7-94e2-c5b903247afd
I also found an article, “U.S. Governments Bonds Fall on Wave of Supply,” that discussed the amount of debt being sold by the Treasury, which stated;
“U.S. government bonds fell Monday as investors were buffeted by three debt auctions representing the first part of nearly $300 billion of debt that the Treasury is selling this week.
The yield on the benchmark 10-year Treasury note rose to 2.843% from 2.826%…” https://www.wsj.com/articles/u-s-government-bonds-stable-on-wave-of-supply-1522077440
It would appear that now is a good time to invest in bonds to insulate against any risk due to the current volatility of the stock market.
Housing and Community Act of 1992 made houses “more affordable” for the average American. In my opinion people should not buy things that they can not afford. However, I feel as if the idea of increasing the money supply and lowering the interest rates to temporarily sustain the economy was a reasonable technique for the Federal Reserve to use. However, economic theory does not always play out like everyone expects it to. It is very hard to predict the future, particularly in Economics. The housing market crash is a great example of this. No one would have expected a crash like that to happen. It is very hard to predict these things. Homes are the biggest purchase that most people make in their whole entire lives. Ben Bernanke’s plan was also an example of this. It had some success, but overall did not work in the long run. The economy is something that fluctuates over time and needs to be managed as best as possible.
the housing crash in 2008 was simply the banks taking advantage of an opportunity taking a risk and gambling that things wouldn’t get out of hand. by offering incentives to home buyers allowing lower income individuals to buy homes that realistically was never in there price range. you cant predict what happens in the economy all you can really do to prepare for events such as that in 2008 is stay on top of the markets everyday and watch and wait for the inevitable. the government dumping money back in to the economy I believe was their first mistake dumping that money only made people hold on to it instead of going out and investing people were gun shy. I feel that we will have something very similar happen again where the people will have all this money at hand and will hold on to it in hopes that there will be a bounce back.
the moved that central bank decides to do is very wisely but also risky. this strategy indeed aims to recovery economy by a large amount of money they got from lowering interested rate. This money gain by the trade-off with the inflation rate, which means the value of dollar money will decrease. I think that the economics at the time really have the reason to worry about hyperinflation. However, this has not occurred. I really interested in this event. It proves that the theory is only the theory so that we can never know what will happens after that. This also means financial learning about inflation have some holes in its that or there is outside influence that affects the theory that we can learn and understand more about the economy
However, the relationship between bond and stock seems interested. The stock is overstated by the money surplus of the financial crisis in 2008. However, it is still stable, which means it has a lot of potential in it.
Financial is very interested because it helps us predict what happen in the future and bring the profit to us
At the time of the 2008 house market crash, I was only about 10 years old, so I didn’t really know what happened, but after reading this post, I understand more fully what helped contribute to one of the largest recessions in recent history. As stated in the article, there are many reasons, but one of the main reasons was because of the over-reliance on the stock market. As people pushed more and more money into the stock market, that money never reached the real economy, causing it to lose a lot of the support it needed to stay stable. As a result, thousands of people lost their jobs, several family friends were left unemployed for over a year, and the government’s attempts to save it didn’t work as well as they could have if they had urged people to invest in the real economy through bonds rather than the stock market.
The idea behind asset allocation is to balance any losses in one class with improvements in another, and accordingly reduce the overall risk of the collection. There is always the market risk, the good example of this would be the market crush of 2008. The asset of the decline all over the country, the stock, bond manual funds etc. the general idea of this is that there is always a risk, but with the smart asset allocation you can minimize the risk. As each asset class has changing levels of return and risk, investors should think through their risk tolerance, investment objectives, time limit and available capital as the foundation for their asset arrangement.
Banks have long been incentivized to create affordable opportunities to buy into the housing market. Although some of these methods are distant memories of greed and desperation, it was not unconventional thinking that led to the housing crisis of 2008. This article does an excellent job of debunking some of the “neo-classical economics” schools of thought. Conventional thinking at the time started off with a simple thought to lower interest rates which would lead to an increase in money supply, followed by an increase in demand for money. However, a bit of a plug prevented much of the money from ever being loaned out. Regulation kept the supply of money with the lenders, and much of it never reached the public. Eventually, a small period known as “financialization” Occurred because much of the growing money supply was invested into the stock market. The speculation of Bonds increasing in value provides another warning sign should interest rates and inflation continue to rise.
The reading is so right in many aspect, is important to have more control of the housing bubble. Lowering the interest rate for a very long period of time in the long run will affected us more than help us. Banks need to have more control of the loans and as well as who are obtaining these. As well as the real regulations that prevent the money to reach the market. The government needs to do something that allows the money to reach the real economy, however not all at ones because that will affect us, as well. In a moderation way, and constantly checking the economy and how its functioning. If we keep going at the same rate as we are doing know is not possible to know what will happen will all that money that remains in the stock market. We absolutely don’t need and want another recession. Its very hard to know what well happen with the economy and even experts, make their best estimated guess but since is so uncertain how the people and the economy will react, nothing can be certain.
Mortgage backed securities were an ingenious idea turned catastrophic when banks began the process of securitizing subprime mortgage loans in MBS. By themselves MBS’s are a creative and relatively safe method of investing, but pooling together multiple subprime mortgages and reclassifying them as anything but a flaming pile of garbage completely undermined the trust investors placed in their lenders. This caused a huge influx of buyers looking for homes, and bidding up the prices of those homes and further inflating the aforementioned housing market bubble. After the Federal Reserve sprinkled water on the flaming pile of garbage that is the banks by effectively throwing money at a problem rooted in and caused by greed, as stated in the article, not all of the money found its way back to investors. As bonds begin to once again gain increasing interest, it would behoove lenders to learn from their mistakes and refrain from creating another crisis by hiding underwritten loans into mortgage backed securities.
It is crazy to me that some things happen unexpectedly in the economy. There are many economic experts in the world but it just goes to show that there are greater economic theories that will be discovered in the future. Not everything happens as expected in the economy but it surprises me that no one took the initiative to get the word out that the money needs to get out into the hands of more people and not in the stock market and banks. I know that growth was slow after the money supply was increased but I’m just wondering on how no one realized where the money was going. I’m not sure on the whole situation but maybe I should dive more deep into this topic. The biggest question I have is how did no one realize where the money was going and if they did, how would they take the action of getting the word out to certain people so that they could fix this problem. What I got out of this blog was that the direction was to make the economy grow back faster. I think the money wasn’t being appropriately used for what it was meant for.
When looking at an AS/AD graph the decreased interest rates lead to a direct increase in AD (aggregate demand) which closes a recessionary gap. coming from the Obama administration this was good idea but as the new administration increases the AD maybe it is time for some contractionary policy to balance out some of the effects of decreased government spending as well as a decrease in taxes
This article has persuaded me to agree with the current financial crisis that there is definitely a need for better control over the capital market. I find it amazing that for so much time we have studied economics and attempted to grasp the subject in full but yet there is always something new that throws us off and amazes us. This catastrophe in economics has shown me that the government needs to make sure that there are more protocols set and put in place to avoid this happening again because an event like this harm all people in the working class. This article also has shown me that even the banks and other well reputable organizations can make mistakes and every organization like that needs to keep a closer watch on the market. I also think that the idea of lowering interest rates to increase the money supply would be something that is very effective in the economy.
This article has shown me that interest, money, and the future of asset allocation is about to change. It all stems back to the Housing Community Act Which ended very bad. This leads to a few years later when lowering interest rates lead to inflation in our economy. People thought that the enormous amount of money would lead to growth and more jobs and know one knew why inflation remained flat. The economy crash of 2008 lead us to where we are today, the economy in the U.S is thriving .This makes me wonder, and i can conclude that after a semester of Macro Economics that the United States is on track for another Depression/crash very soon.