johnnymk

Greenspan stated that cheap money didn't create the housing bubble, but that it was a result of other nations piling their excess money into America.

If that is true, where is that excess money today?

zippyjuan

Just trying to guess what he may have been talking about here.
If foreign countries have lots of money they want to put someplace, the US has one of the strongest economies and the least risk for investing in. If they decide to purchase government securities like treasury notes and bills, that rising demand means that the treasury can offer then at low interest rates- they do not need higher rates to be sure they can sell all the bonds they want to.

There are several indexes which are used to determine the rates charged on adjustable mortgages, but they tend to move pretty similarly. The general tracker is mid term bond rates since mortgages are often backed by them.

Rising demand for US bonds and securities started to lower the indexes starting in January of 2000. Adjustable rates followed it. http://mortgage-x.com/general/indexes/cofi.asp Housing prices started to rise around 1992 as people noticed the lower rates. A lower interest rate means that for the same monthly mortgage payment, a person could afford to borrow more money and thus pay more for a house.

Rates on adjustable loans continued to decline. In 2003 the Fed started to increase their prime interest rate, which was at a low of 4.0% at that time. It was raised in steady steps until it had doubled at 8.0% in 2006. But due to strong demand for treasuries and other government securities, rates for adjustable interest rates did not start to head up until July of 2004.

The lower cost of borrowing did not follow Fed moves in most cases for about a year and a half. It did allow would-be home buyers to spend more for a home than if rates were higher and this helped push the prices of homes higher in turn. By July of 2007, interest rates had only increased by 2.25 points from their low (2.25% to 4.5%) while the Prime rate had peaked a year earlier- at four points above its low.

So it definately appears that there were other forces in the market that effected rates on mortgages outside of what the Fed was doing. Was it foreign money? Sounds possible to me.

As far as where that excess money is today- they are still buying US Securities (which they have not sold but are holding- probably until maturity)- just not at as fast of a pace. The money which is disappearing is those who lent money to those who can no longer pay it back and those who bought a home at a higher price than they are trying to sell it for today.

Just my thoughts.

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