RateWatch #427  Business Cycles
October 2, 2004 by Dick Lepre

I) Fixed Rates

30 year conforming*  0 point   5.75% 
15 year conforming   0 point   5.125%

30 year Jumbo  0 point  6.00% 
15 year Jumbo  0 point  5.375%

5 year fixed conf. no points   4.875%
5 year fixed Jumbo no points   4.875%

If you are concerned about closing costs, consider, also, these "no cost" refinancing options:

30 year fixed conforming (loan amount >$175,000 and  <= $333,700     5.75%

30 year Jumbo  no cost  6.25%

* conforming loan limits for are:

1 unit   $333,700
2 units  $427,150
3 units  $516,300
4 units  $641,650

Prices above are for 45-day rate locks with no impounds. Rates are subject to change.

To apply on-line - we lend in 8 states (see notice below) - go to:

Click on "Apply on-line" on the left. 

Select: "Fill out our Complete Application Form."

Select "Dick Lepre" as the loan officer from the pull-down answer to: Which Loan Officer are you working with?  

Residential Pacific Mortgage is now licensed to lend in the following states: California, Colorado, Idaho, New Mexico, Oregon, Utah, Virginia and Washington.

II)  What's Happening

Note that we are at one of those annoying times when the techs point to short-term (next 12-15 weeks) higher yields and rates and the long-term tech points to lower yields over the next 11-14 months. This will mean slightly higher yields and mortgage rates until (approximately) mid-December.

This long-term bull market will always have these 12-15 week upcycles and 12-15 week down
cycles superimposed.

III) Business Cycles

Do business cycles really exist? If they do exist, what causes them and what can be done about them?

Business cycles are the "ups and downs" of economic activity.  The most generally accepted
measure of economic activity is Gross Domestic Product. Ups and downs also occur in the jobs
market which causes consternation to the unemployed and provides discussion topics for politicians.

It is unquestionable that there are economic cycles of expansion and contraction.  An excellent source is the National Bureau of Economic Research:

There is no regular periodicity to these cycles and, consequently, some object to the use of the work "cycle" but that is entirely semantic. If you don’t like "cycles" call them "ups and downs".

Economists go to lengths to describe these cycles and what causes them but, for me, the issue is
simple and basic. Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or metaphysical force. They are a result of the nature of the way businesses work. Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.

There is an interesting social side to this which I believe we all miss in our daily capitalistic
discussions.  To a social-economic-philosopher like Karl Marx these ups and downs and the
anxieties created by them were one of the things that would eventually do in capitalism.

Marx had a 19th Century affinity for the working class and saw that capitalism was a
forward-thinking, revolutionary way of doing things and he had an insight. He suggested
that over time, capitalists would invest more and more in new technologies, and less and
less in labor. On this point, his thinking is relevant to the present.

Marx always had this notion that capitalists exploited workers by keeping the "surplus value"
(profit) that their labor had. He believed that surplus value expropriated from labor was the
source of profits, but concluded that the rate of profit would fall even as the economy grew. He believed that recessions resulted from shortfalls in the amount of expropriated profit.  He believed that these recessions drove down the price of labor to points where the investment in new technologies re-enabled growth and profit.

Of course, it would be difficult for Marx to have imagined the adaptability of the capitalistic system.  The powers that U.S. labor unions had from 1930-1960 enabled industrial workers to
assure themselves that they got their fair share of that "surplus value".  Capitalists realized that a bigger advantage could be had for all by enabling the middle class to have their own home, a couple of cars and afford education for their kids.  The notion that the proletarians (folks who sold their labor for cash) would be taken advantage of by the bourgeoisie (the bosses or company owners) is not the state of affairs in mature capitalistic societies. Marx was rooted is the concept of classes which have largely vanished in modern America where the vast majority of us are middle class homeowners. These notions are more accepted in a country such as France which has an advanced capitalistic economic system which is imbued with socialist notions about labor and entitlement.

But I have digressed.  What I was trying to point out was that Marx viewed business cycles as an
inherent flaw that would lead to the undoing of capitalism because of the social discord caused
by the recessions and depressions that were the downside of business cycles.  The last shot
his theory really had was with the Great Depression but capitalism somehow survived that.

In recent years (Volker/Greenspan) it would appear that the Federal Reserve has taken the pain
out of the ups and down by a combination of regulating the money supply and controlling
interest rates.  In 2001 we got into a modest recession conjoined with the events of 9/11 which could easily have created a long-term recession.  Quick action by the Fed helped to end the recession almost immediately.

During the 1990's we saw a lengthy expansion of the economy with high job creation, low
unemployment and low inflation. Some thought that we had created a "new economy" where
business cycles were eliminated.  Unfortunately the same rules took over: Opportunity knocks,
business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple. The only difference was that the up cycle lasted longer than usual. The trough to peak cycle lasted for 120 months (March 1991 - March 2001).

Dick Lepre
633 Battery Street #110
San Francisco, CA 94111