Hello,
Could you explain me what is the connection between Asian savings and 30-year conventional mortgage rates in this article http://mises.org/daily/3203 (Figure 2)? Why Robert P. Murphy wonders that V-shaped graph (mortgage rates) can be explained by an inclined plane (developing economies’ savings rates)?
Thank you in advance…
I think what he’s saying is that it can’t be. The different patterns of mortgage rates versus foreign saving show no correlation, and that it is the Fed which is really to blame.
The Rev
But how Asian savings can make influence to 30-year conventional mortgage rates in the United States at all? Why he is comparing these data? Is any correlation possible?
He is critisizing Greenspan’s theory that the housing bubble correlates to increased Chinese savings. So, he is refuting the thesis, not trying to prove it.
Greenspan really let us down, IMO. He wrote a fine article favoring hard money in “Capitalism: The Unknown Ideal” and was part of Ayn Rand’s inner circle for years. How he could go from a radical champion of liberty and free commerce to being the helmsman of the Fed I will never know. That was a real loss.
The Rev
Money that has been saved has to be invested somewhere. Money will flow to other countries if there are no opportunities home or somewhere greater yields are available. If Asian saving end up in th US to be loaned, it will push mortgage rates in the US down (greater supply of funds).
Keynesians like to blame savers for crisis, savers are for them “the ultimate evil”. Reckless spending and taking more debt that you can pay back is a virtue for them. Asian savings is just a scapegoat. The real level here is psyhological, not economical.
Greenspan’s chain of reasoning is as follows:
Mortgage rates are determined by the banks. The banks determine the mortgage rates by adding the yield on 10-year treasury bonds to their spread. The senior officers of each bank determine what their spread will be. It generally remains fixed for extended periods, whereas treasury yields change constantly. Therefore, if a bank has a spread of 3% and 10-yr. treasuries are yielding 4%, the mortgage rate quoted will be 7%.
Yields on treasuries are determined in the bond market. If the demand for bonds goes up, the yields go down (see my prior posts for the mechanics). In recent years, Americans have been saving and investing less, and most of their investments have been in stocks and higher-yielding securities. Consequently, the yields for 10-year treasuries would have increased, driving up mortgage rates. Conversely, Asians have been saving and investing more, and much of their savings have gone into U.S. treasuries. This has driven treasury yields down, bringing down mortgage rates.