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.
After reading, Interest, Money, and Future of Asset allocation, I believe the federal reserve was not intentionally trying to harm our economy. Although, yes, when they decided to lower rates and increased the money supply, it did have a negative affect on out economy. They did not know the outcome of their decision. its called trial and error; you have to take chances to get results. As a result of this crisis, the lower interest has allowed the banks to borrow more money and help people who created inflation in the economy in the first place. The US economy is always changing and there is no way to predict the outcome. There should be a balance between the lowest and highest the interest rate is allowed to be changed.
When the Housing and Community Act of 1992 was created, it was done so with the intention of making the economy better. Reduce the interest rate and lend more money to put back into the economy, what could possibly go wrong. I am not aware of this being done prior to 1992 so this was a “let’s try and see what happens”, this might have been a bad way to handle the situation, once the money is lent, they lose control over where the money goes and how it gets used and since it doesn’t appear that the money went straight into the market, this ended up affecting the predicted outcome. In my opinion, the banks were lending out money, and even though these were backed by mortgages, the people who were borrowing possibly could not afford to sustain the payments for a long period of time, even at the lower interest rate, therefore later defaulting on the loan. This goes for any corporation as well, once they borrow money and later default, the lender is taking a financial hit thus taking a loss and money not going back into the economy. Now if a big percentage of borrowers default, the lender may need a government bail-out or other sort of relief.
So what I got from the article is that due to the financial crises of 2008, the interest rates were lowered and the money supply increased. but due to maybe some regulations passed and other unknown reasons, inflation did not increase as unemployment decreased. Investors saw stocks more attractive mostly because bonds were purposely made unattractive and therefore caused many investors to inflate the stock market. So the money never enters the economy. or “Financialization.”
Heres my question: if an overvalued stock market is a problem than why in the news is everyone so excited for the sharp increase in the value of stocks? Also, If interest rates of bonds go up in order to try and maybe combat the inflation in the stock market would it be a good thing that the stock market start to decrease in the next few years? Or is there another solution that doesn’t involve increasing interest rates?
– Jessie Belew
Hearing that the economic stimulation that was supposed to go into the real economy was instead put into the stock market is perturbing to say the least. While I recognize the necessity of the actions that were taken, I believe that there may have been a way to prevent this diversion of the money supply. Based on this article, the same lowering of interest rates that allowed for the increased money supply from the banks de-incentivized bonds and thus increased the attractiveness in getting stocks. That investment was considered a viable option during this timeframe is reasonable as many companies’ stocks were selling below what they were likely to be in more stable times. This would also be viewed as a protection and an alternate source of income should the investor loose their job, as was the fear during that timeframe. What would have been helpful is if the monetary policy was coupled by an effort by state and federal sales taxes being temporarily decreased on a select few items. If this were advertised properly, it would have been seen as a “sale” from the government which would have encouraged spending and increased the speed of recovery.
The financial crisis from 2008 were unfavorable because interest rates were lowered, and money supply was increase. the value of the U.S dollar decreased, and people were losing money. With money supply increasing at an alarming rate creating rapid amounts of inflation increase. Majority of the money going into the stock market and never reaching the real economy explains why the economy had a hard time recovering.
Fnu, M Shoaib
Based on this article, I learned that the Housing and Community Act of 1992 was a failed policy. Also, the efforts and the economic policy of financial crisis of 2008 was not successful because it did not recover the economy as quickly as it was expected. Beside apply of all the theory elements, such as decreasing of interest rates, increasing of money supply, extending of discount window program for central bank and bail out of other banks, the goal was not achieved completely. For instance, it increased the job opportunity, but it did not cause inflation.
I believe that some of the economic theories do not give the result quickly, but in the long term, it do. For instance, the economic policies of Great Depression showed its fruits after ten years. I believe that the financial crisis of 2008 policies will achieve its goal in next few years, and we will be witnessed a positive inflation.
To give a brief summary of a key part of the text. Essentially what was the catalyst for the downfall of America’s housing market was bad Mortgage backed securities (MBS). In short, mortgage backed securities are just a bunch of mortgages put into a group. These groups of mortgages are then given the name “mortgage backed securities” and then sold to a bank, the government, or just random people looking to invest. As time passed these mortgage backed securities began to make a bubble in the housing market and this bubble finally bursted in 2008 and plunged our economy into a deep recession.
So in order to correct the economy the government’s plan was to bail out big banks, lower interest rates, and increase the money supply. These actions were taken with the intent to “flood” the economy with the money required for the economy to bounce back. And there’s evidence that this worked to some degree. But along the way some of that money never made it to actual economy. It instead ended up in the stock market somehow. This is interesting in the sense that how could this have happened? in a time where regulation and oversight should have been critical in every aspect of U.S. economics.
Honestly, I always thought that if you increase the money supply without giving it some form of actual value, it would just cripple the economy and to some extent, it did.The stock market got blasted as a result, banks had to start increasing the money supply and flooding the economy with money with little to no value. Inflation still hasn’t hit the 2% mark we were looking for, and as a result, the value of the dollar is still decreasing, or rather goes back and forth on certain days. You could also form an argument saying how we are still feeling the effects of the recession, especially given the value of the dollar being lower than it once was and still decreasing.
What I understand from this article is that the Housing and Community Act of 1992 was in all, a huge failure to repair the economy. It called for a decrease in cost and easier way to pay for housing with the use of mortgages. Once everyone was using this and borrowing the money from the banks, banks were left struggling to hold on to money. They had to borrow money from bigger banks and the whole system turned into a disaster. The government then tried to solve the problem by pushing more currency into the market. The forced inflation didn’t help the economy either with most of it ending up in stocks, still not solving the problem. In the end, the economy got very little, if any help at all from this attempt and no other real help was ever presented.
In the article Interest, Money, and the Future of Asset Allocation, it begins to describe on how the Housing and Community Act of 1992 came up with new ways to help make housing more affordable in vulnerable populations. It is stated that the banks would popularize the mortgage backed securities (MBS) which had ended very badly. During the financial crisis in 2008, the Federal Reserve thought that it would be beneficial to flood our economy with currency which would help restart the economy over. As soon as this occurred, banks would start to borrow large amounts of money with higher inflation which was soon to follow. During this time, when inflation rates didn’t reach the target of 2% after each year, the market knew something had gone wrong. This assumption was noted that the money put into our banking system would quickly enter the real economy and spur inflation. The majority of that money was never loaned while some of it went into the stock market instead of the real economy. In the end, the economy recovered very slowly because it really didn’t get any help.
What I got from the article is that sometimes our economy may be hard to control and predict. The article describes the Housing and Community Act of 1992, and how it wasn’t actually helpful for the economy, despite the efforts and good intentions of banks and economists. The same thing happened during the infamous financial crisis of 2008. In an attempt to improve the economy, banks lowered interest rates which would translate into more loans, jobs, and therefore a healthy and recovering economy, while also creating inflation. At first, this plan worked brilliantly, but economists soon noticed that while the unemployment rate did go down, the inflation mark never reached the 2% “benchmark”. This meant that all that money didn’t actually go to the economy, bur rather stayed within the banks, or went into the stock market.
Now, we have higher interest rates and inflation, which leads some economists to believe the stock market may go down eventually, or, best case scenario, not see any significant growth.
What I got from the article was that the Housing and community act of 1992 motivated banks to figure out a way to make housing affordable to normal citizens but it really just resulted in damaging the economy because the banks responded in a way they shouldn’t have. They popularized MBS which fabricated a huge housing bubble that ended poorly. While the crisis was happening the solution was to lower interest rates so there would be more loans taken out, and created more jobs to build up the economy again. This plan worked for a while, and unemployment rates went down and inflation went up. Overall, the economy recuperated slowly but surely.
The article talks about the Housing and Community act of 1992 and how it was a failure to the economy. They lower the interest rates to make housing more affordable and increasing the money, but the credit crisis resulted from the bursting of the housing bubble in 2008. Majority of the money went into the stock market and banks not helping the economy. We have to be open to the idea that the economy moves slowly but it could bounce back up. As a stock owner I can say that right now is looking good but I know that the stock market could crash at anytime we can’t really predict the future of our economy. Another thing is where is all the money going? Because it seems like is just staying in the banking system and the stock market that could be the reason why the economy is moving slowly. Real help is never really been there to help the economy so I do not understand what the government is expecting.
According to this article, I could learn about the impact between economic decisions, money, price, interest rate, unemployment and investors, as well as how they could influence on each others. Firstly, the origin of all occurrence and consequences originated in Federal Reserve decisions. Because of supporting the banks to popularized mortgage- backed securities and the hope of restore the economy again, the Federal Reserve sought to adjust a lower interest rate. This idea was supposed to lead a bunch of following results which would affect on all economic elements. The demand of money was increasing rapidly, and the money supply resources were also extending from central banks, private banks and investors at the lower interest rate. Unfortunately, despite of the belief in neo-classical economic and monetary theories, the money did not go straight as expected to the real economy. The enormous amount of money, however, was stuck in stock market. Thus, the real economy could not be recovered efficiently as expected. Instead, a unexpected hyperinflation led the real economy overstimulated. In conclusion, every economic decision from every key economic party, especially from government policy, should be controlled thoroughly and throughout in progresses.
This article taught me what went wrong with our economy in 2008. I learned that interest rates were lowered to increase money supply in the real economy. Instead, the money supply was invested in stocks, so the 2% inflation was never reached. Bonds never had a chance, thanks to investors’ way of thinking. I learned that investors have a lot of considering when it comes to where to place their money due to “opportunity cost, risk, and total returns”. You can try to predict what actions people will take, but you can never really be 100% sure.
Before reading this article I knew very little of the 2007/2008 economic crash. Now, it is clear to see that the banks were lending money to homeowners that were in no shape to repay their loans. Also, while the interest rates were lowered to help increase the money supply, the money never truly entered the economy because it went to Wall Street. While the economy has gotten better from this crash, it never has fully recovered to the desired inflation. This was caused by hyperinflation and a disaster to the economy caused by the banks and the Federal Reserve.
With the Dodd-Frank Act regulating Wall Street, there seems to be no incentive or try in investors. They don’t allow investors to tap into certain markets or industries and that reduces the amount of money circulating in the economy. Which makes the people hold onto their money which hurts the economy even more. If Wall Street was deregulated, then investors would have unlimited possibilities to invest in untaped markets.
Before reading all of the posts and the article I did not truly understand a whole lot of what happened in 2007/2008. and to tell you the truth I am not sure I completely understand it much better now. But what I did grasp is that the banks lent to much money to home owners who really could not pay it back. The money some how went back to wall street instead of the economy. and that is why we are in the place we are now. Now I am not sure what the stock market stuff happening the past few days is going to do to all of this but I am pretty sure it cant be good.
So if the money actually went into the stock market back in 2008 wouldn’t that have put real money into various companies to be used for growing there companies or being able to hire new employees those creating more jobs. Also how did this money even find its way into the stock market and not the real economy when that was the original. It seems as those this may have been an intention act by the US government to give big companies money under the table.
I honestly knew very little and understood very little of the economy. After reading this article I have a better understanding of the causes and effects of the stock market, low/high interest rates, loans, and money supply. I find all of this information very interesting and I’m eager to learn more just in case we have another recession I will know how detect it and prepare me and my family for it.
So from what I can understand was that the initial plan to recover the economy from the financial crisis of 2008 was to lower interest rates and increase the money supply, to flood the market with currency. And it seemed the plan was working well at first, inflation never really surged as planned because all this new money was never going into the “real” economy instead being put into the stock market or never being loaned out at all. Thus leading to the economy recovering much slower than it was initially expected to. So my question is, was there anything that could have been done about this? I mean if the only way the economy could recover is if money was put into the “real” economy, could there have been something else the federal reserve or anybody else really, that would ensure that money would actually go where it was needed most?
What I understood from this article is that the Housing and Community Act of 1992 did not go as the government expected it to and was a disaster. The government’s goal was to make houses more affordable to the lower income populations. The government then made Mortage-Backed Securities (MBS) which they sold to banks and people that were interested in investing. These Mortgage-Backed Securities created a huge bubble in the housing market. This led on until 2008, when the US economy went down the drain and started a financial crisis. In order to fix the economy the Federal Reserve’s plan was to lower interest rates, increase the money supply and to bail the big banks out of their hole and to flood the economy with money to be able to fix the financial crisis. There is evidence that The Federal Reserve’s plan somewhat worked, but somehow majority of the money went into the stock market. If the money would have gone to the right places their plan would have worked a lot better.
The information I was able to gather from this article, was that our economy sometimes has unpredictable shifts and outcomes. The article mentions the Community Act of 1922 and how it did not actually impact the economy in a positive manner. This same sort of residual action happened during the financial crisis of 2008. While attempting to improve the economy, banks had introduced lowered interest rates, which would later result in an increase in jobs, and loans. This plan had ultimately intended to lead to a recovered economy, while at the same time introducing inflation. While this new action did work at first, economists soon had realized that even though the unemployment rate did drop, inflation had not reached the 2% mark. This lead them to believe that the money never really went into the economy, but rather stayed in the banks, or lead off to the stock market. Now our inflation rates and interest rates are higher, which points to the conclusion that the stock market may drop eventually, or not see any significant growth.
-Adam Wylie
From this article I learned that lower interest rates mean more money, but are not always a good thing. The Housing and Community act of 1992 was created to help banks popularize mortgage-backed securities, to allow vulnerable people the opportunity to buy a house. This was not as successful as the government had hoped and led to a rough ending. People could not pay back the money they loaned and they lost their houses. The 2008 crisis involved how the Federal Reserve intended to lower interest rates, raise money supply and bail out banks in and effort to surge the economy with money. Banks started borrowing large amounts of money and economists hoped this would spike inflation. This was not the case at all. They ended up putting too much money towards stocks and causing interest rates to go down but bond prices went up. This led to investors to trade stocks over bonds. There was money dumped into the stock market that never reached the economy which was defined as financialization. This in turn led to a slow improving economy. The plan was supposed to bring more jobs and increase inflation, however this was not the case at all. The unemployment rate slowly decreased but the inflation rate stayed below 2%.
-Rylie Bryand
From this article I learned that lowering interest rates increases the money supply in an economy as well as increases the price of bonds. People believed that with the increase in money supply their would be an increase in jobs along with inflation in the economy. With this knowledge banks in 2008 believed that with more of a money supply that more people would begin to invest however this was not the case. Much of the new money supply did not enter the economy or was just put into Wall Street because of strict regulation that had been put in place such as the Dodd-Frank Act in 2010. With all of this happening the banks were led to pull out massive amounts of money leading to the market crashing
Up until this article I never knew about the action Ben Bernanke and the Federal Reserve took to attempt to fix the financial crisis, or the result of it. I knew money was being printed excessively, but I didn’t know why. Now I understand that in 2008 federal interest rates were lowered, to increase loans, and bring money back into the real economy to restart it. At first the plan seemed to work, but over time the progress got stagnant. The reason being that the money circulating was never reaching the real economy but instead entering the stock market. Bonds lost value, and stocks increased in value. Now, times are changing. Interest rates and inflation are increasing, and it looks like bonds will be the preferred method of investing over stocks. As a result, the stock market will be affected and stocks will lose value. It looks like the United States economy is slowly regaining its strength.
The article Interest, Money, and the future of Asset Allocation depicted an accurate summary of economic times in America from the early 90’s to current. The Housing and Community Act of 1992 was a key contributing factor to a major financial crisis for the U.S. Although the Act was implemented with good intentions as it made mortgages more attainable for all classes because of relaxed restrictions for approvals, this would in time negatively affect our economy. The subprime lending led to foreclosures and a market that was not showing signs of recovery. This sparked the financial crisis of 2008. In efforts to spark the economy quickly the federal reserve lowered interest rates, increase money supply and bail out big banks. These efforts initially looked promising as money supply increased and rates decreased, however, after a short-lived success it was alarming that inflation was holding steady and unemployment rates decreased, this was a sign that the market was not stabilizing. In fact, the money that was intended to flood the economy by reducing rates and increasing money supply was actually making its way to the stock market as it was a more attractive place for investors. The recovery of the U.S. economy has been slow since the recession and that is attributed to the fact that the money intended to reach the economy never actually did as the actions investors took was completely unpredictable.
The Housing and Community act of 1922 created a burden on the US economy which went on for many years. In 2008 the federal reserve and other key individuals took charge and made it a priority to try to salvage and repair our economy. In order to flush more money back into the economy, the decision was made to lower interest rates. In theory, this was a good plan, however, the money failed to enter the real economy and was instead loaned away therefor it became virtually unusable. Because of this, the plan did not work out in the way that was intended. One thing that I found interesting in this article that I had not realized is that growth and inflation happen simultaneously. Since inflation is seen as a negative thing and growth as a positive one, I never would have imagined that they go hand in hand.
After reading the article titled, “Interest, Money, and the future of Asset Allocation” I have a better understanding of the current economy and the events that took place following the Housing and Community Act of 1992. The act was intended to make houses more affordable and mortgages easier to obtain for the lower income class of society. While it was successful in making loans available to individuals that wouldn’t traditionally qualify; unfortunately, over time this theory would end in the historical financial crisis of 2008 as many of these borrowers could no longer pay their debt. In an effort to relieve the financial burden caused by the housing bubble, the Federal Reserve decreased interest rates, increased the supply of money available, and bailed out banks in an effort to stimulate the economy. This plan appeared to render success, but only in the short term because inflation did not reach the 2% mark as desired. The money that was intended to flood the economy from the immediate relief efforts never actually made its way into the everyday market. People unexpectedly opted to invest in the stock market instead. These unfavorable times did not end quickly; in fact, our economy continues recovery efforts today. The current times are reflecting higher interest rates as well as an increase in inflation which demonstrates a healthy economy.
(Oscar Chavez)- From what I can understand this article is speaking mostly on how interest and money drives people and the economy. Too much money and interest has a negative effect on the economy and too little money and interest is also bad for the economy. So you need to find the perfect balance. For example if the prices of houses are lowered than more people are willing to buy them and over time the demand rate is high. So high that company’s start making more houses and raise the price. And as the prices start increasing the demand for houses decrease. When interest rates are lowered people are more willing to buy and take out loans because they know most of their money is going towards the principal instead of going to the company they borrowed the money from. Lower interest rates also comes with lower monthly payments and an increase in money supply since more people are willing to spend the money. But as always the economy goes up and down all the time and it either fixes its self over time with the help of the government or no help at all.
Megan Billnoske
To get a better understanding of the economy we have to first go back to where we tried to fix it the first time. The Housing and Community Act of 1992 which was created in hopes of making the economy better for instance people tried to come up with ways to make different things like houses more affordable to the people who do not have as much money. In 2008 there was a financial crisis which caused interest rates to lower and increased the supply of money. Banks started to barrow money from other countries. When people started to realize that the unemployment rate decreased and the inflation remained flat even with all of the money that was added to our economy. After the money was added to our economy it should have recovered quickly however it really didn’t. Inflation rates were soon to go up. Nobody thought about the long-term effect adding so much money would do. Nobody understood why the U6 and U3 unemployment rates went down but they did.
My thinking is that why do we add barrowed money to our economy if in the long run it only can turn on us for adding it by putting our nation in debt to othercountries?
After reading this article, the initial problem began with housing being too expensive. So they made the House Act of 1992 – which gave incentive to banks to come up with more innovative ways to make houses more affordable. In return, banks responded by popularizing MBS which ended horribly. So the federal reserve sought to lower interest rate, increase money supply, extend discount window program to central banks, and bail out other banks in effort to flood economy with currency to restart the economy. I feel like all this did was decrease the value of money and forced inflation on the economy. People and banks were taking out massive loans, and in the long run they weren’t able to pay it off. And instead of all the money going into the economy, it started going into stocks, which created a surge in the stock market. Who knows how the economy would have thrived if all the money eventually went back into it. I feel like the intentions of the House Act were good, but it didn’t fall into place the way that they had hoped. As a result, to this day we are still struggling to repair the economy.
After reading the Article, I learned that the extension of the Housing and Community act of 1992, made banks come up with ideas and ways to find a way to make houses more affordable to the so called “vunerable population.” This ended up creating (MBS) which is bad. Afterwards the Federal reserved tried to lower interest rates and increasing the money supply into the economy. After 2008, many people were scared that inflation was getting higher while interest rates were close to 0. The fed. reserve knew something was going on when the target 2% of inflation was not met. The increase of the money supply did not go as planned. Some of the money was never loaned and some of it went into to Wall Street. Investors had to switch to stocks instead of bonds to maximize their utility. The plan to restore the economy after 2008, did work to some extent but not as expected. It was due to the fact that a lot of money went into Financialization, not in to the real economy, which means the economy did not receive any “real help.” Now because of higher interest rates and inflation, investors are switching to bonds again.
I believe that instances, like the housing act in 1992, was doomed to fail; but not before seeming like the answer to so many consumers issues. By lowering interest rates, in the hopes that more people could get funded, it also took on an inevitable risk that backfired when the borrower simply couldn’t afford or pay it in anymore, which in turn caused an avalanche that negatively affected our entire economic situation. In 2008, when the federal reserve flooded the market with lower interest rates, more money supply and bank bailouts had a negative effect because some of the money never even made it to its intended target and ended up on wall street. I think the intentions are always good but as a nation its inevitable to have lucrative and less lucrative eras. Growth and inflation are a balancing act, one that hasn’t been mastered yet and one that likely won’t ever be because its a hamster wheel that seems to rise and fall with each new decade/decade and a 1/2 thinking it will have the great “answer” to keeping our economy stable and thriving. I think we are finally starting to see an upturn and more of a balance but we are also entering the next decade/decade and a 1/2 so we shall see.
Kaylee Scott
When reading the article titled, “Interest, Money, and the future of Asset Allocation” I Ilearned that the Housing and community Act of !992 was made to increase the economy and make it better, but this ended up being a failed policy and did not work out. Another economic policy that was not successful was the financial crisis of 2008, this policy was unsuccsesful because the interest rates were lowered, money supply increased, and extending of discount window program for central bank and bail out of other banks. These factors caused the economy to not recover quickly and resulted in failure of the plan. When this was going on and inflation rates did not reach the target of two percent “benchmark” after each year the market knew something was going wrong. This meaning that all the money did not actually go to the economy, it stayed in the banks or went into the stock market, which is called financialization. This is the reasoning of why the economy recovered so slowly. Currently, we are now entering a world of higher interest rates and inflation and bonds will get higher again but that does not mean the stock market will go down. This just means that returns on an annual basis will be lower compared to periods of lower interest rates.
After reading the article “Interest, Money, and the future of Asset Allocation”, I got a better understanding of factors that affect the allocation of assets. When the Housing and Community Act of 1992 which caused the popularization of mortgage-backed securities or when the Federal Reserve lowered interest rates as to increase the money supply in the real economy. However, these factors are not the only ones that affect the way that the public reacts and chooses where to allocate their assets. When the interest rates were lowered, there was an increase in the demand for money and this implied higher levels of inflation as a trade-off for the growth of the economy. However, the fact that the economy has not recuperated at a faster rate may imply that something went wrong along the way. I believe that because of the regulations that are put in effect by the Federal Reserve, the public’s trust in the economy goes down and in turn affects where their assets are reallocated.
What I gather from reading this article is that the housing and community Act of 1992 was not nearly what the government wanted and was more of a disaster than anything else. The government had to try and figure out a way to fix these problems that were going on in our country. They decided to lower the interest rates and in turn increased the money supply but that came with inflation, which is something they had to try and risk to get back on track. This theory was working flawlessly as they wanted it to but then banks started to borrow massive amounts of money and this is when people thought inflation was about to be at an extremely high amount. People were starting to get scared there may be hyperinflation. The inflation was not where experts thought it was going to be and they knew something went terribly wrong. In the end they had to take this risk because all the problems but they didn’t really fix what they were trying to fix and they just made a new problem.
-Korbin Tucker
What I got from this article is that the Housing and Community Act of 1992 did not end up going as the government expected it to and was a disaster. The government was trying to make houses more affordable to the lower income populations. The government then decided to make Mortgage-Backed Securities (MBS) which they ended up selling to banks and people that were interested in investing. These Mortgage-Backed Securities created a huge bubble in the housing market. This went on until 2008, when the US economy went down the gutter and started a financial crisis. They tried to fix the economy by creating the Federal Reserve’s plan, which was used to lower interest rates, to increase the money supply, to bail big banks out of their hole and to flood the economy with money to be able to fix the financial crisis. There are indications that The Federal Reserve’s plan somewhat worked, but most of the money went into the stock market. The plan would have ended up working out a lot better if they put money into the right places.
From this article, I learned that it is difficult to create and put in place policies to help the economy as their are many unexpected factors that can play a role in the influences these policies
have. After the disaster created by the Housing and Community Act of 1992 which caused the recession of 2008, the government needed to set in place a policy to fix the economy. Their solution: Ben Bernanke’s plan to lower interest rates and increase the supply of money to banks. They thought this would cause small banks to borrow more from the federal banks which they could then lend out to companies. This would allow this extra currency to reach the “real economy” and would in a way jump start the economy, but would also cause inflation. Instead, much of this money was never loaned out and was instead just invested on stocks. This did not allow the money to reach the real economy and caused the plan to run much slower than expected. There is evidence that the government’s plan to jump start the economy after the Recession of 2008 somewhat worked, but it did not go as intended due to factors that the creator of the plan did not expect.
-Brian Gensheimer
After reading this article, I was able to better understand the unpredictableness of the economy. Although the Housing and Community Act of 1992 seemed like a good plan to make houses more affordable and to improve the economy, the act did not turn out as expected and instead created an economic crisis. From what I understand, the government assumed that by lowering the interest rates, and increasing the money supply that they could flood the economy with enough money to re-start the economy and increase inflation which in effect would decrease unemployment. What the government did not foresee is that a lot of the money was never loaned out, some went in to wall street, and a lot went into the stock market as the value of bonds dropped. In my opinion this was very risky of the government due to the fact that they had no control over where the money would go once it had been loaned out and the act should have been more well thought out.
-Julia Smith
Kimberly Nguy
This article talks about how interest rates, inflation, and regulations affect the economy and the stock market. It is interesting to note that our current economic situation evolves as market failure occurs and government steps in to help. Sometimes government intervention may help the economy but may not always be best such as the banks easily lending money to promote economic growth in the Community Act of 1992 or the bank bail outs to protect consumers. So now the interest rates are rising, bond prices are lower, one would expect a better return by investing in stocks. As I am learning more about economics and how money gets transferred from households to financial institutions to businesses, it seems the money supply did not get transferred to businesses and that’s why our economy is slow to grow. Again, it is a balancing act between strict government policies and ones that allow for more less regulations that will hopefully stimulate our economy.
From reading the article first think I gathered was that the financial crisis in 2008 tried to help those who could not necessarily afford a mortgage, the banks lent out money to lower interest rates so that those homeowners could then do so. But then it seemed that during that time and though interest rates were lower, the banks weren’t surly going to get paid back. All of this was going on when I was in high school so to me I never paid attention to what was really happening. I think that this was good in theory but did not reach its full capability. It does go to show though that gathering from an old theory and trying to make adjustments to that can be necessary. I believe that maybe a tweak or two can make this reach its full potential and can really be successful. It can work with just a little more time.
Lowering interest rates was not a solution to a failing economy, it was just a Band-Aid to prevent a depression. This is a good theory, if it is backed up by a true solution to raise an economy out of financial crisis. For the purpose of raising the economy out of debt, this theory failed. Flooding the economy with money does nothing to raise unemployment rates or add jobs to the economy. A permanent solution would have been increasing tariffs on imports and lowering corporate tax rates. This forces companies that make their money exploiting cheap labor in other countries to move those labor jobs back into the United States. Band-aid solutions cause more problems later on because printing money and forgiven debts have to be backed by the federal reserve, which then decreases the value of the US dollar and creates a cycle of debt that eventually destroys the middle class.
In response to this article, I learned that the economy can be unpredictable at times. The Housing and Community Act of 1992 provided the lower income class with more affordable housing and easier mortgages. This sounds like a great idea, however, it impacted the economy in a not so great way through the economic crisis in 2008. In hopes to keep the economy stable, lower interest rates were sought, an increase in money supply was needed, and the Federal Reserve extended its discount window to central banks. Lowering the interest rates increased the money supply, which results in an increase in investments as well. However, the suspected increase of inflation levels never occurred and it never broke 2% throughout 2008. Due to the mass amount of currency needed, the value of the dollar decreased. The large amount of money in the economy was supposed to create more jobs and raise inflation; however, unemployment rates decreased as inflation remained flat. Due to the investors resorting to stocks rather than bonds, the money never quite made it to the economy and landed in the stocks. This is known as “Financialization.”
From reading this article I learned that the Housing and Community Act of 1992 that was meant to help make the economy grow. and Instead of a positive impact on the economy, the Housing and Community Act of 1992 ended in a downfall in the economy. It makes sense that lowering interest rates would help the economy. This helps by allowing more people to buy houses and eventually putting more money into the economy. With a higher money supply, the demand for it would go up. The charts in the article proves this. Because businesses were borrowing cheap money everybody thought it would open up more jobs and eventually decreases the amount of people who were unemployed. This plan did not work, instead of unemployment rates going down they began rising and inflation was flat. I learned that the government can not predict how the economy will end up in the long run, they can just do their best to try to improve it.
After reading this article, I learned that the Housing and Community Act of 1922 was put in place to better the economy and help it grow. They thought that lowering income and making houses more affordable would help the economy. Sadly, the Act did the opposite it caused and economy crisis. The banks were giving out more money with lower interest rates to make things more affordable, but the banks weren’t seeing the money that they lent out. As a solution to this problem the Federal Reserve lowered interest rates, which would increase the money supply and help bail out other banks to help money flow back into the economy. This solution wasn’t 100% effective. It helped in the short run, but not in the long run.
From this article I can conclude many different things about money and interest rates. Between 2008 and now, inflation has continuously grown, as the charts in the article above show, and interest rates were brought down. Although this could help with the demand for money, it would only help short term problems. This could not be a permanent fix to the long term need for money. The idea with decreasing interest rates was that, with inflation being another factor in this situation, the U.S. would have more money and this would result in the decrease of unemployment. For this particular idea, it was smart and made sense, but unfortunately it did not follow through to help with unemployment and just money in general. The lowered interest rates made the stock market not as appealing. All of this being said, I don’t think this idea was very effective in preventing the U.S. from going into a depression. Now that interest rates are being raised, along with inflation, the stock market has become more appealing and the economy is thriving more than it was in 2008.
After reading this article, of “Interest, Money, and the future of Asset Allocation” I have come to the realization that the housing and community act of 1992 encouraged banks to come up with new ideas to make houses more affordable to people, but it failed to be accomplished. In order to help the financial crises of 2008 the federal reserve sought to lower interest rates and the money supply was increased, by all means it was meant to flood the economy with currency to quickly re-start the economy. And so making it easier for private banks to borrow money from central banks and to later on lend to other companies. With the increase of the money supply and the rapid rate of inflation, the majority of the money went into the stock market and never making it to the real economy, which explains why it took so long for the economy to recover.
Adding to what I wrote in the above comment I think that this article is very good information about the 2008 financial crises that the country went through. I personally do not remember going thru a hard time because I was like 10 years old. But I’m sure other people struggled financially because of the 2008 financial crises.
Imagine blowing a bubble. The bubble will continue to grow and grow until it gets too big. What does it do when it gets too big? It will eventually pop. This metaphor reflects what the economy did on 2008. Theoretically speaking, inflation rates should have skyrocketed, but for some peculiar reason they did not. Many people ponder why this could have occurred, but in my opinion it is that a theory is just a theory. When you look at the scientific method, a theory is just a hypothesis that has a lot of testing done and the data collected supports the hypothesis. It takes just one minute aspect of a test to prove a theory wrong. That is what I believe happened in 2008. One of the reasons it took so long for the economy to get back on its feet was because so much money was invested in the stock market, but none of it reached the real economy. The reason that so much money was invested in stocks was that the value of bonds plummeted. Investors need to invest their money in something, so they switched over to stocks. If a majority of the money invested in the stock market had gone to the economy maybe we would have been able to rebound from the infamous crash of 2008.
Carly Alford
From reading the article, “Interest, Money, and the future of Asset Allocation,” I have a better understanding of the growing economy today. I now understand the failed effects of the Housing and Community Act of 1992. This act was made to create ways to make houses more affordable to lower income levels, but instead it was a major component contributing to the U.S. financial crisis. In order to relieve the burden of the housing bubble, interest rates were decreased, money supply was increased, and banks were bailed out. This was only a short-term solution because inflation did not reach the expectation. After the money was added, inflation rates went up. Financializing occurred, the money went to banks or into the stock market, instead of going into the economy. I believe that even though this did not fix the problems in our economy, an effort like this was necessary in order to test out innovative ways to solve problems.
Interest, Money and the future of Asset Allocation is seeing a new era after the financial crisis of 2008. Federal then responded by decreasing the interest rates in order to increase money supply and increase the demand for money in short-run. But this step was expected to give way to the increase level of inflation. In reality there was decrease in U3 and U6 unemployment and inflation remained flat. People cited anemic growth and over- regulation as a reason for that, decrease in interest rates also leads to increase in price of bonds i e. The values in stock market. Thus, old theories had been successfully used to restore the economy after 2008. The money that was a jump in the economy went into the stock market and never reached real economy and that is why the economy recovered very slowly. Today’s world is that of higher interest rates and inflation and hence bonds become valuable again and hence stock markets now give returns on an annual basis lower than the times of low interest rates. Hence , from above article we can infer how to allocate ones’s asset as per the health of market i,e. during recession times or during the times of high interest and inflation.