Tuesday, October 30, 2012

End Manipulation, Let the Markets Clear!

Dees Illustration
Ron Paul

French businessman and economist Jean-Baptiste Say is credited with identifying the fundamental economic principle that aggregate demand for goods in an economy will equal the aggregate supply of goods when markets are permitted to operate. Or in Say’s words, “products are paid for with products.”

English classical economist David Ricardo, among others, more fully developed this principle into what has become known as “Say’s Law.” Say’s Law, according to Ricardo, leads us to understand that market equilibrium for goods is constant. This simply means that markets, when left alone by government planners or other fraudulent actors, inexorably tend toward an “equilibrium price” which eventually balances supply and demand for any particular good. Thus markets will clear themselves of any surpluses or shortages in the form of excess supply and demand.

This important corollary of Say’s Law-- that markets clear-- is critical to understanding the moribund US housing market. In housing, perhaps more than any other good, we see the terrible consequences of government and central bank interference with market forces.

First, the Federal Reserve Bank relentlessly increased the money supply over the last few decades. Much of this newly created money and credit flowed from Fed member banks into the residential and commercial real estate markets, causing prices to rise dramatically prior to the housing bust of 2007.

At the same time, the Fed systematically suppressed interest rates for decades. This led to tremendous malinvestment both by homebuilders and individuals, and encouraged a seedy subprime mortgage industry to make nonviable loans that would not make economic sense under market interest rates.


Congressional meddling in the mortgage market also added tremendously to the problem. Inane legislation like The Community Reinvestment Act literally forced banks to make thousands of loans to bad credit risks. Similarly, Fannie Mae and Freddie Mac put taxpayers on the hook for millions of mortgages that never would meet market underwriting criteria. And of course the real estate and homebuilder lobbies made sure mortgage interest debt (unlike most personal debt) remains tax-deductible.

The ultimate result of these interventions by our caring friends in Congress and the Fed has been the biggest housing bubble and crash in US history, leaving millions of Americans underwater on their mortgages if they have not already lost their houses altogether. Congress and the Fed are directly responsible for millions of shattered lives, and almost unknowable economic damage in the form of trillions of dollars in mortgage backed securities.

The only solution to this mess is to allow the US housing market to clear. All of the bad mortgage debt must be liquidated, whether via foreclosure or bankruptcy. Banks holding substantial mortgages or mortgage backed assets must face the music and adjust their balance sheets to reflect today’s reality. Undoubtedly this will force many banks into immediate insolvency, but such banks must be allowed to fail without receiving another nickel of taxpayer money. Banks took the risks and made money during the bubble years; those who exercised bad judgment must now accept the consequences of their actions.

Never in American history have we needed to adopt a policy of laissez faire more desperately; never has government seemed more determined to artificially prop up an industry. But only by allowing the housing market to clear can we hope to rebuild our shattered economy from a stable foundation. Clearly there will be pain in the short term, but we owe it to younger Americans and future generations to allow the reemergence of a rational housing market.


BE THE CHANGE! PLEASE SHARE THIS USING THE TOOLS BELOW


BE THE CHANGE! PLEASE SHARE THIS USING THE TOOLS BELOW

2 comments:

Anonymous said...

This is a very incomplete analysis.
Government is not the only source of market manipulation. Corporations, banks, industry moguls were manipulating prices, hoarding and otherwise gouging the common people long before the Fed came into being.
Yes, the Fed has dramatically-amplified the scope of the manipulation, but to suggest that "the market" would become free again, simply due to the non-interference of government, is ridiculous.

Doug Diggler said...

Uh David is the absolute worst economist of all times, he is the reason why england decided to stop growing its own food and that's why England almost starved during the U-boat blockades of WW1 and WW2 because ALL their beef was coming from Argentina. Likewise the Financial Collapse of 2008 had nothing to do with bullshit "pendulum movements" of the economy or any kind of cyclic event, it was a premeditated implosion to crash the economy so oligarchs could swoop in and buy everything at firesale prices. As usual, Ron Paul is a cat's paw for the Koch Bros and other depraved, degenerate rich kids who should be dangling by a noose instead of dictating how the economy should be run.

Post a Comment