QE & inflation/deflation

HAMISH_MCTAVISH

Can I just say it is a pleasure having you contribute to this forum. It is sadly rare these days to have a proper debate with someone that makes you think. You do that, and I am sure we would all welcome your input more often.

Now with that out of the way, I must respectfully get back to arguing.:D

princeofpounds wrote: »

Actually, Hamish is right here but there is a detail in here I was trying not to get into in order to avoid overcomplicating things.

I think an excess of simplification has caused many of the embedded, and erroneous, positions in this forum to begin with.

Banks need a profit margin on top of the rates at which they lend to the government. This is because mortgages are riskier than lending to a government that controls the money supply. Because banks were in such trouble recently and were not able to lend much they were not competing much at all with each other. So mortgages became very expensive relative to base rates, but at the same time base rates were cut so the net effect on the borrower wasn't that different.

But you shouldn't just consider the apparent pricing of a single unit of credit. You have to look at availability, which collapsed. Although the price of the credit that was made available remained roughly constant, credit as an aggregate commodity was far more expensive (or valuable if you are the one that can extend it) because less was available at the same price. That's actually a matter of the suppy curve rather than simply price, but price is nothing more than a signal of scarcity of supply.

True.

What you describe here is mortgage rationing, which was achieved, as all things are in a relatively free market, through price. Either the effective price per unit of credit, or the entry "price" (or barrier) of high deposit requirements.

As the availability of funds for lending for new purchase decreased, so did house prices. As the availability of funds for new lending has increased throughout 2009, so have house prices. Spline at ukhouseprices.net has done some excellent work on mortgage approval levels required for house price neutrality, that has proven to be remarkably accurate. Have you seen it?

Here I differ (assuming you mean physical supply and demand). I would contend that the availability of credit has always had a much stronger effect on house pricing since it became the primary method of financing property purchases. But that is another argument (which i'm willing to go into in another thread when I get the time, I'm not trying to dismiss it and its a valid viewpoint).

I would greatly enjoy that debate, and I hope you return to have it. I have outlined my position on it in many previous post, but in a nutshell, credit restrictions will only ever have a short term impact. Where there is a genuine physical supply and demand imbalance, as I believe we have today, the market will always find a way to ration limited supply through price.

Or to put it another way, supply and demand always balance. Only the price changes.;)