Mike, below is a section taken from Roach on consumers
Modigliani makes an outstanding point, highlighted in bold
this lower rate REFI phenomenon will backfire on lenders
(just when we are focused on the homeowner benefits)
this lower rate environmt will backfire on certain consumers
(just when we think it helps them)
very intriguing, more than mere ideas, but macro thinking
if money is coming too easy to borrowers, like in REFI's, then the loss comes from someone's or some company's hide
NAMELY MORTG-BACKED SECURITY HOLDER, BANKERS, MGIC INSURERS
according to Dept Commerce, for 2001,
$1090 B/yr in interest income verus $590B in interest expense paid
so lower rates are subsidizing the younger indebted homeowners at the expense of the older retired citizens living off interest and dividends
wow, well put, parts already known, but now succinctly clear
so banks and bondholders will be weakened further
so older consumers are hurt, offsetting young overconsumers
net damage to the economy on both counts
that is a major reason why lower rates beget even lower rates
and the Liquidity Trap acts like a BLACK HOLE !!!
Roach concludes a major adjustment is coming for American consumers
just a matter of when
the relevant passages:
We also spent some time discussing the latest rage in Wall Street consumer theories -- that low interest rates would provide a windfall to household income that would keep the consumer afloat. The record refinancing bonanza now under way certainly seems to hint at just such an outcome. But Professor Modigliani sounded a note of caution on this count as well. "For every borrower who gets a boost in purchasing power, there is a lender who loses." He went on to add that "they may be different people (borrowers and lenders), but it is the net effect that matters for the macro economy."
At that point, a light bulb went on in my own atrophied brain. Years ago, my research revealed that there was a certain perversity to the response of US consumers to fluctuations in interest rates -- rising rates didn't seem to hurt nearly as much as most of us thought. It turns out that's because consumers are net lenders to the rest of the economy -- their interest income is well in excess of their interest payments. That still holds true today. For example, in 2001, US Commerce Department data show that households received some $1,091 billion in interest income, well in excess of the $592 billion paid in interest expenses. In other words, while refis help in a lower interest rate climate, those dependent on interest income -- especially retirees -- are hurt. And to the extent that the consumer sector has more interest income than debt service, it may simply be wrong to conclude that surging refis are always accompanied by booming consumption.
In my opinion, the combination of these two theories sends an unmistakable message: The carnage of a popped equity bubble spells a major adjustment for the saving-short American consumer. It's just a matter of when.
/ jim
AI
