Interesting post in the Minyanville:
It has always nagged at me to understand what Greenspan’s motives might have been when he issued the “educational” oratory on how much better off consumers would be with adjustable rate mortgages. At the same time that I was screaming at my clients to lock in the low fixed rates…it just dawned on me … that encouraging consumers to use ARMs gives the Fed another tool in their toolbox. It imposes risk on the consumer, but since the Fed controls the short end of the curve, they can withdraw liquidity through rising mortgage payments but can also more directly inject liquidity back into the economy by lowering the short term rates that ARMs are linked to. (more details in the link)
So, the idea is that the consumer that can be hung by the neck with adjustable mortgage rate could be easily forced to reduce his consumption to fight inflation when needed. It also helps to shift some risk away from banks toward consumers.
What can I say? It means the Republican party has stupid people from both ends at the same time.
From one side, they make the most brainwashed and redneck part of population, the so-called religious right, to suck in believing in hypocrisy of his wars on terrorists, gays and scientists. They are manipulated through fear and hate that is easy to trigger in simple minds. They are devoted republican voters.
At the same time, Greenspan made those simple minds to take the risk side to the bottom in the economic equilibrium by making them to pay for financial imbalances that trigger inflation. If Bush administration wants to print money for horribly expensive war for oil and have no inflation at the same time, then screwing ARM holders is an easy way to go.
I’m glad I do not participate in this. Or at least I think so.