links for 2007-06-23
Michael Clemens on the Real Immigrant Underclass: "The People Who Wanted To Come, But Could Not"

Jim Hamilton and Mark Zandi on Interest Rates

In the Wall Street Journal:

Econbrowser: Econoblog on interest rates: I was pleased to participate in the latest Wall Street Journal Econoblog with Mark Zandi, Chief Economist and co-founder of Moody's Economy.com. Here's a brief preview of what you can find over at the WSJ. Our topic was the following question:

Treasury-bond yields, a benchmark for market interest rates, scared investors earlier this month with a sharp rise, and pull back. What was behind the uptick? And what does it mean?

And here is part of what we said.

Hamilton: Long-term bond yields are generally procyclical, falling with the decreased spending and borrowing that accompanies an economic slowdown. Indeed, a lot of us look at the spread between long-term and short-term yields as a predictor of what is going to happen to economic growth. When the 10-year yield fell below the overnight fed funds rate from 2006:Q2 to 2007:Q1, that was followed by slower than average real GDP growth. But if investors are now expecting stronger growth, that could explain why nominal rates, TIPS yields, the dollar, and stocks have all risen together...

Zandi: Behind the higher rates is slowly evaporating global liquidity. This is most evident in tighter monetary policies across much of the globe. Central banks ranging from the European Central Bank to the Chinese Central Bank are in the midst of a series of tightening moves. Indeed, the Federal Reserve is the only major central bank not expected to tighten policy again before the year is over....

Given that 80% of mortgage loans are fixed rate loans, this will be another significant hurdle for the housing market to overcome. The spring selling season was already a bust prior to the run-up in long-term rates. Home sales are being hit hard by the tightening in lending standards in response to the stunning erosion in mortgage credit quality. It will be very difficult to make any progress in reducing the bulging inventories of new and existing homes without further substantial cuts in housing construction and house prices.

Hamilton: Unfortunately, Mark is exactly right about housing. I had been among those who incorrectly predicted that lower mortgage rates would arrest the housing downturn last fall. I think we did see some evidence of a rebound, but then the sector was hit badly by the tightening lending standards Mark mentioned. Now with mortgage rates back up and, as Mark also noted, the inventory of unsold homes, it's hard to find any reason for optimism in this sector. But the housing bust has been subtracting 1% from annual GDP growth for a year now. What we've clearly seen is that, unless some other part of the economy follows it down, a recession in housing need not mean falling overall GDP.

There's much more over at the WSJ...

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