And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high.
When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify.
But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing.
So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with.
I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology.
They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it.
Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work.
And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high.
When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify.
But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing.
So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with.
I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology.
They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it.
Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work.
I think we'll find out soon.