Wednesday, January 21, 2009

Mortgages get Cheaper

The Bank of Canada dropped its interest rate by half a point to 1%, and the banks dropped their prime rates by the same amount to 3%. The banks have been criticized for not passing on lower interest rates to consumers, but they have this time. In some cases, mortgage rates have dropped by more than half a point.

It’s interesting that in the aftermath of a financial crash brought on by too easy credit, particularly in the US, the fix is to make credit easier to get. I’m not saying that I disagree with this policy; it just seems a little ironic.

Eventually we will pull out of recession, and it will be interesting to see how close we get back to the way things were. In theory, banks should have learnt some lessons and should maintain higher standards for lending money than they had before the crash. But, they face considerable pressure to loosen their purse strings right now.

I’d like to think that lending policies in the future will be sane, but we may see lending standards deteriorate over time building up to another crash. Preventing another such crash probably requires changes in banking regulations, but there is little appetite for such regulations now that we are in recession.

If we do have another orgy of derivatives and packaged debts, I hope Warren Buffett will be around to warn us again. I might take action based on his warnings the next time.

2 comments:

  1. It is ironic that the same thing that got us into recession will hopefully get us out.

    I've heard economists say that people have to save more, but if everyone adopts a frugal lifestyle all at once, the economy will be crushed. Makes the interest rate cuts more understandable.

    As St. Augustine said, “Lord, Make me chaste, but not yet”

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  2. Gene: I guess the solution is for me to be frugal and everyone else to spend wildly :-)

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