Interest rates being held so low for so long disadvantages the working class. It may look like you're paying fixed "prices" for things, but that's just a cover over what always comes down to a bidding scheme. Sometimes that's even directly visible, like when buying a home. Since borrowing money is so cheap. you end up in bidding competition with people who took out the cheap loans, meaning you either have to come up with more money yourself through other means, or compete with them by taking out loans yourself. The worse off you are, the more likely you are to end up doing the latter.
The end result is the entire working class is enmeshed in debt all the time just to stay even with where they would have been if the interest rates weren't so low.
It's astonishing how effective the upper class was at coming up with this policy to endebtify the entire middle and lower class without ever once talking with each other about how to do this or coordinating any actions to produce this result. It just sorta happened. Neat for them.
Household debt is overwhelmingly about home ownership, first of all which affects richer working people. Housing prices mainly have to do with housing scarcity in good areas, which is a density problem.
Workers have been getting fucked, but blaming interest rates is simplistic and counterproductive as the ability to do more fiscal stimulus as aided by low interest rates would be in their favor.
Housing prices in a given market vary inversely with interest rates. Sure, scarcity has an effect which is why I said "in a given market". When someone goes to a bank looking for a home load, the first thing they are is what your income and expenses are. From there, they figure out how high your monthly payment can be, and from there using the current interest rates they calculate how much you can borrow. Everyone - sellers, agents, banks - pressure you to spend as much as possible, and one average they succeed. That means lower interest rates will enable you to pay more at the same monthly payment. In other words, the buyer will have roughly the same monthly payment regardless of interest rates. Those rates will determine how much money goes to the seller vs the bank over 15 or 30 years.
Low interest rates cause artificially high prices which don't benefit society, just the sellers. They also lead to banks not paying interest on savings, which discourages savings. They also encourage all sorts of high prices. The current cost of a college degree is due to government guarantees on student loans, which largely didn't exist when I got mine (at a much lower price even adjusted for inflation).
And finally, something I think is true but haven't worked out all the math. It's not lower interest rates that stimulate the economy, but the act of lowering them. If we were at a steady state, reducing rates by a fixed amount and keeping things steady should produce a short-term (perhaps a few years long) spike in GDP, after which things will return to an equilibrium possibly lower than before the rate decrease (or the same or slightly higher I don't know) but less than the short term bump. The opposite is also true, raising rates will cause problems so much be done very slowly. The Fed has the US economy backed into a corner of sorts. The only way out seems to be to ignite a lot of inflation and raise rates slowly so as not to cause another collapse like 2007 (which was triggered by an abrupt rate increase).
So first of all I think home-ownership is bullshit for other reasons. So I don't really want to defend it.
> In other words, the buyer will have roughly the same monthly payment regardless of interest rates. Those rates will determine how much money goes to the seller vs the bank over 15 or 30 years.
Yes
> Low interest rates cause artificially high prices which don't benefit society, just the sellers.
Private ownership of land is a racket, yes, but you as you just said the mortgage payment should be the same as effects bank vs seller's cut. The payment structure matters more than the total price.
> They also lead to banks not paying interest on savings, which discourages savings.
Was there every a time when working class savings amounted to something in aggregate? I suspect the whole "the holloi polloi needs to learn to be frugal" has been all moralization not economics for quite some time.
> The current cost of a college degree is due to government guarantees on student loans, which largely didn't exist when I got mine (at a much lower price even adjusted for inflation).
The problem here isn't rates, but the moronic guarantee without strings attached. This is classic privatization -> regulatory capture. The government should just fund public schools and private schools can go fend for themselves.
> And finally, something I think is true but haven't worked out all the math. It's not lower interest rates that stimulate the economy, but the act of lowering them.
Certainly monetary policy is overhyped and not neutral as the neoclassical ones believe. (Anybody with half a brain can see that the COVID stimulus payments had affect that a decade of QE didn't.)
Maybe check out https://jwmason.org/slackwire/the-natural-rate-of-interest/ I think that is pretty close to what you are saying. If there is no natural rate, but many different equilibria, then we do care more about changes to the rate than the rate itself in some sense.
They are what you get when people save too much money as money is zero sum. If one person saves, someone else doesn't. The only way to break this game is to stop saving or to lend the savings out. The private sector doesn't want them so rates drop to 0%. The government doesn't want them (ok biden changed course, go biden!). People hate government debt just as much even though they don't know that if the government doesn't take the debt it's the private sector that has to take it on and rich people have an easier time pushing the debt off to the weaker part of the population. e.g. financial crisis with subprime mortgages.
>They also lead to banks not paying interest on savings, which discourages savings
Everything would be fine if those savings were gone. For obvious reasons. Too much savings means there is no need for savings. Savings are only virtuous when they are needed. Kind of paradoxical isn't it? Because people want to be virtuous someone has to create a destination for those savings and it turns out the biggest destination is housing.
>It's not lower interest rates that stimulate the economy, but the act of lowering them.
It's much simpler. The 0% interest floor is purely man made and interest rates are still too high.
>The opposite is also true, raising rates will cause problems so much be done very slowly.
Raising rates would cause problems because rates are too high to begin with. Why would you want them to be even higher?
>The Fed has the US economy backed into a corner of sorts.
It hasn't. The Fed doesn't do anything. It's the private sector (companies, consumers, rich people) and the government that are doing everything to back the US economy into a corner. The Fed is merely the institution that has to act when everyone else failed to act and since the problem wasn't caused by the Fed it also cannot be solved by the Fed without giving it additional powers.
>The only way out seems to be to ignite a lot of inflation
The only way out? We are talking about an institution that is unable to meet its inflation goals. Of course it needs high inflation, not as a way out, it needs them to do something as boring as meeting its inflation target.
>and raise rates slowly so as not to cause another collapse like 2007 (which was triggered by an abrupt rate increase).
2007 wasn't caused by abrupt rate increases, it was caused by savers dumping their money into bad debt. The interest rate increase just caused all that bad debt to fail.
Be happy you guys got Biden. He's doing everything possible to ensure that the US economy recovers. Meanwhile I get to live in a country where the incompetent do nothing party got elected 16 years in a row. See you in 2% inflation heaven while we suffer in deflation hell.
I'm not presenting this as the answer to why home ownership is screwed up. I'm presenting this as a significant part of the answer to why everyone is so indebted in general. With debt so "cheap", anything you are competing with other people for, which is basically everything in the end, you are competing with people who took "cheap" debt. When the path is greased, at scale it will be taken.
Stimulus, incidentally, has much the same problem. Yeah, great, everyone gets $3000 or whatever, but now you're just in competition with other people who just got $3000. It's not a complete loss, of course, but people advocating for it always want to talk about the benefits in pre-stimulus currency, but people spend it in post-stimulus currency.
Deposits in a bank account need borrowers. If you keep depositing money the bank will have to find worse and worse borrowers until you get the 2008 crash.
Just let the government take the debt and get this thing over with.
The end result is the entire working class is enmeshed in debt all the time just to stay even with where they would have been if the interest rates weren't so low.
It's astonishing how effective the upper class was at coming up with this policy to endebtify the entire middle and lower class without ever once talking with each other about how to do this or coordinating any actions to produce this result. It just sorta happened. Neat for them.