OP-ED COLUMNIST
Questions of Interest
By PAUL KRUGMAN
Published: April 20, 2004
....If the economy fully recovers — or even if investors just think it will — interest rates will rise sharply. In its World Economic Outlook report, to be issued tomorrow, the International Monetary Fund urges the Federal Reserve to prepare the economy for higher rates to "avoid financial market disruption both domestically and abroad."
But how far will rates rise? Let's not get into Greenspan Kremlinology, parsing the chairman's mumbles for clues about the Fed's next move. Let's ask, instead, how much rates will rise if and when normal conditions of supply and demand resume in the bond market.
My calculations keep leading me to a 10-year bond rate of 7 percent, and a mortgage rate of 8.5 percent — with a substantial possibility that the numbers will be even higher. Current rates are about 4.3 and 5.8 percent, respectively; you can see why the I.M.F. is worried about "financial market disruption."...
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Now for the obvious point: many American families and businesses will be in big trouble if interest rates really do go as high as I'm suggesting. That's why the I.M.F. is urging the Fed to get the word out.
And one suspects that the fund, which, like Alan Greenspan, tends to convey messages in code, is firing a shot across Mr. Greenspan's bow. A number of analysts have accused Mr. Greenspan of fostering a debt bubble in recent years, just as they accuse him of feeding the stock bubble during the 1990's. Just two months ago, Mr. Greenspan went out of his way to emphasize the financial benefits of adjustable-rate, as opposed to fixed-rate, mortgages. Let's hope that not too many families regarded that as useful advice.
http://www.nytimes.com/2004/04/20/opinion/20KRUG.html