Balancing Mortgage Rates Problems Faced While Balancing Essay

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  • Subject: Economics
  • Type: Essay
  • Paper: #14969412

Excerpt from Essay :

Balancing Mortgage Rates

Problems Faced While Balancing Mortgage Rates

In general terms the monetary policies that contradict themselves mostly involve the process of changing the amount and level of the supply of money in a particular country. When it comes to talking about the expansionary monetary policy, it means that it expands and increases the flow and supply of money, then the impact it has on the monetary policies is that the flow or supply money decreases and hence so does the currency (Fisher, 1932).

Expansionary Monetary Policy

In the U.S., when the government wants to increase the supply of money, it can do so with a combination of three points.

By purchasing various securities from the open market which are also known as the open market operations

It can also be done by lowering the discount rate by the federal government.

It can also be done by lowering the reserve requirement.

All of these points have a direct impact on the economies interest rate. Starting from the first point when the federal committee buys the securities from the open market it makes the price on those securities rise, this can be explained by the phenomenon of dividend tax cuts, in dividend tax cuts all the bond prices and interest rates are indirectly related in proportion. In this respect it is safe to say that the federal discount rate is an interest rate, hence if it is lowered it means that the interest rates are lowered as well. However, if federal committee decides to decrease the reserve rates it will affect the working of banks and hence they will increase the amount of they normally invest. Hence this can have major effect on various investments such as the price of the purchases of bonds to increase, so that the interest rates fall.

For a good part of the past 2 decades the U.S. economy has experienced an entire flood of rates that have increased tremendously, or the rates have lowered to concerned statistics and then there have been the market hurdles and the increase and decrease in taxes. But yet it has managed to survive, but is the right balance out there? Most studies suggest that there cannot be a balance because if there were such thing as a balance then it would take its action in unbalancing the balance. The expenditures that the government makes is the main foundation of the ripple effect, which causes the rates to increase or decrease, it is also responsible for taxation, the increase in debts and hence it affects every indicator which is connected to the economy. But all cannot be blamed on the government the expenditures that are made are caused by the expenditure that the people make for instance their income and most importantly mortgages that effect these spending factors such the defense, health, social security etc.

When it comes to the mortgage rates and the rise in them it can be predicted that it can happen the in the near medium of future (Eggertsson, 2010). Especially in the U.S., since the economy is showing a surprising fall in the 0.5% falls in the mortgage GDP in the last quarter of the year 2010 which followed a slump in the U.S. dollar against the euro and the pound. The rise in inflation has forced everyone to think that the rise in interest is an inevitable thing, the current shocks that the economy is facing has turned each and every theory by the economists and researchers upside down. With further confirmations coming from the IMF which has reported to have said that even though interest rates are at their highest it would still make less impact on the broad economic issues that the U.S. And the entire world in general is facing currently. Some analaysist and researchers also suggest about the end of the year downfall of the economy, and say that it was mostly because of the extreme cold which just like in the past has caused major delay in new construction projects. Other suggest that last year's economic downfall presents a meek outlook of what can be expected in the 2011 when it comes to interest rates, mortgages prices and its effect on the economy, since all suggest that the graph presently seems to go downwards. However all the mortgages holders should be happy with the news that there is less possible chance that the interest rates will raise like they did in the beginning of the years? However, all buyers are confused an alarmed by the mixed sentiments that are being put forward by the economists and markets out lookers hence the overall future looks very disturbing (Easton, 2011).

Mortgage Rates and Economic Impacts.

However, the question still stands, what is the current situation with the mortgage rates in the U.S. right now? What are the main causes that lead to the rise and fall of them? Is It because of the federal government? The economic conditions? Or the inflation? Other factors to be considered are, is it the banks? Or is it the president?

Then answer to all these incomplete questions are that rates increase does decrease due to a number of factors which are mostly related to the condition and the working of the economy.

The money for mortgages can come from many sources, which includes various deposits at the banks and the brokerages, but it also comes from the various investors who invest in the markets this process is also known as the "capital markets" (Sims, 1980). In this process all the investors who are interested in purchasing a particular kind of debt instruments, which also include bonds; eventually come to buy the above terms. The process of attracting investors, people who sell bonds are almost always in competition with each other so that they get the money. This is done by providing a variety of instruments which are also called "products" in lay man terms, with different packages of returns of risks over differing periods of time (Segalstad, 1997). The competition comes when these offers are in competition with one another because they offer and promise a similar performance, such are the U.S. treasuries, the corporate bonds and the foreign bonds.

Idea is to identify who these investors are and what is the reason that they are so fickle? Mostly they are everyday common people who are interested in enhancing there properties who are only interested in two things, low payments on the debts that one owes especially when it comes to mortgages and also high returns on their investments. Hence people are only interested in buying bonds that are low yielding in nature whether in concerns mortgages or not, because the investors will surely take their money somewhere else if they find that their returns is too low. Investors mostly demands a particular given type of government which mostly requires them to play a certain role in the yielding of the moving markets, because if one considers a general map, investors always have hundreds of places to invest their money in (Eisner, 1986).

Considering this it is safe to say that it is a crowded market where there are more sellers than there are buyers and the sellers present their product with other competing investors in the chances that will get the dollar. Investors normally demand their products to withstand the rise and falls that investment strategies sometimes out a person into. Hence if the demands fall then it is up to the investors to make their package attractive again, hence the question arises, how to make investments attractive? It is usually accomplished by raising the interest rates. However as simple as it looks it is not as easy and simple as that. The fact to be considered here is that mortgages market investors…

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