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.