Bush said yesterday that the U.S. “will continue to act to resolve this crisis and restore stability to our markets.” John McCain–during his last “townhall” debate with Barack Obama–said, “But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy. And we’ve got to give some trust and confidence back to America.” Obama replied, ” Sen. McCain is right that we’ve got to stabilize housing prices.”
It all sounds good enough. Who wants “instability” after all? But it is the instability of falling prices that is absolutely necessary to an economic recovery. It is the necessary “creative destruction” on which all free market economic activity depends. Bad investments have been made. No one–other than politically less powerful first-time home buyers–was complaining much as housing prices were rising. People were getting rich just for living in their house. Now the former instability of artificial high prices must be followed by the instability of falling prices. Only when prices bottom out in housing, the stock market, and in general, can a recovery begin. And, while this painful process is most visible in the housing market, it’s true across the board.
Deceptive “par value” accounting of crummy assets, attempts to prop up overbuilt home prices, and various pockets of malinvestment will tie up assets, capital, and labor from more productive enterprises. Obviously, no one wants chaos. But an inordinate fear of a cleansing contraction is wasting money and dragging out this entire mess. By further weakening the dollar by increasing the national debt, it invites greater chaos in the future. Paulson’s $700B is going to be wiped out trying to bail out sinking ships, transferring money in various unforeseeable ways. What will we do in a few months when that $700B runs out and its supposed “investments” in byzantine financial instruments turn out to be worthless.
Murray Rothbard in his excellent book The Great Depression noted that various measures begun under President Hoover to induce artificial spending and “stabilize” wages prevented the necessary adjustments–in everything, including wages–needed for an economic recovery. Then, as now, politicians congratulated themselves on their commitment to stabilization. Far from being a heartless, laissez faire incompetent, President Hoover simply undertook New Deal style program, but with less panache and flair for public relations than his successor
President Hoover said–not so differently from McCain and Obama above:
I have instituted . . . systematic . . . cooperation with business . . . that wages and therefore earning power shall not be reduced and that a special effort shall be made to expand construction . . . a very large degree of individual suffering and unemployment has been prevented.
The panics of 1819, 1873, 1896, and 1907 are footnotes to American history, almost all over in a year. Yet in the “enlightened” age of government intervention and the Federal Reserve system, we witnessed the most massive depression in American history, which lasted over 10 years, as well as periodic recessions ever since. During the 1930s, as now, calls for government spending, loose money, “stability,” punitive measures against “speculators,” and various ill-advised schemes were pervasive. Then, as now, politicians, the media, and other elites pushed for consensus and for the government to “do something . . . anything.”
Would that we examined our history, where the instability and lack of government intervention in previous economic crises also allowed them to resolve themselves more quickly than those of the 20th Century.
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In your next to last paragraph, you made the point that I was going to mention. An economic crisis used to come in the form of a short, sharp shock (Pink Floyd, I think), followed by a more prolonged but sustained recovery. Painful, and probably tragic for some, but brief.
This has been discussed in a previous thread, but it’s meaningless to approach the current situation with the attitude that housing, or anything else, has some sort of platonic, intrinsic worth. Some of the housing stock built in the past five years won’t even make back on the market the cost of construction. How much won’t make back that cost? That’s what the market decides.
The current economic crisis has various components, and obviously the flow of credit between banks is one of them. But to the extent that this problem is related to credit default swaps and mortgage backed securities, we can’t just wish away the fact that a lot of the bubble-induced construction is going to lose money, because people simply won’t be willing to pay enough to cover its production. The only way they ever might have was under the assumption that the value of the property would always and inevitably rise, and that assumption is now gone.
During past “panics” “recessions” etc., in
the USA, two factors were very different.
1) Prior to FDR, one had to have the full
price of the property to purchase it;
enough in assets (such as owning other
real estate used as collateral); or agree
to a mortgage (private mortgage) with
the owner of the property.
The idea of purchasing a home (property)
with no money down, with insufficient
income, was a pipe dream; that became
a reality because of social engineering.
Now the smoke has dissipated and the r
eality of our foolish actions is in full view.
During prior economic hard times (including
the Great Depression) the USA did not
import a great number of goods; as
compared to exports. The products were
grown, mined, manufactured in the country.
The means of production were owned by
Americans Not our government or
a foreign government.
I don’t see how the USA can recover
unless we protect our industries and
employ our own people to work in them.
I am not opposed to “free trade.” Just as
long as the trade is really “free” in that
our competion doesn’t manipulate their
money or have their own tariffs against
our goods. I believe that our trade
polices should be on a country by
country basis. If our competitors have
protectionism for their industries; we
should have tariffs against their goods.
If the “free trade” is not recipricol; it is
not really “free trade;” it is most assuredly it “anti-American” trade!
[...] missing in action from what amounts to a plan for a plan–the whole thing is a charade, and we can expect more calls for multi-billion dollar bailouts and continued tanking in the [...]
[...] delaying the inevitable. It’s cowardice of the most extreme kind, which presumes to “stabilize” housing and avoid the massive wealth crisis of our lopsided economy. Obama and all of [...]