Wednesday, February 11, 2009

Re-inflating the bubble?

The news that Senate Republicans have added "tax relief for homebuyers" to the stimulus bill is not good news, says Doug Bandow at The American Spectator:
The housing market bubble burst. It cannot be reinflated. The bust will be painful, but dumping more money into the market in an attempt to inflate prices will only slow the adjustment process. The pain is unfortunate, even tragic for some people, but inevitable.
Exactly -- a point made by Ron Paul just yesterday. While driving to Washington, I was listening to C-SPAN radio coverage of the House Financial Services Committee hearing with Federal Reserve Chairman Ben Bernanke and caught this:
Ron Paul . . . says that, as a free marketer, he is also upset that Congress wants to prop up housing prices when there is a glut of housing on the market. "What's wrong with allowing the market to allow these prices to adjust," and drop quickly, so that "we can all go back to work again?"
That is to say, from a free-market perspective, those houses are worth whatever they'll sell for. The losses caused by the collapse of the bubble are real, and until those losses are realized -- that is, until the houses are sold and the market readjusted -- we are living in a state of economic denial, which Senate Republicans are attempting to prolong.

This is what Michelle Malkin has been trying to say in her many months of outspoken opposition to Washington's bailout/stimulus frenzy. The market is the market, and you can't fool the market. It might be the only thing that Ron Paul and Michelle Malkin agree about.

UPDATE: While trying to find video of Dr. No's statements yesterday, I found this video from February 2007 -- two years ago, before the bubble burst -- where he's talking "fiat money.":

This sounds kooky at times, but his essential points are correct:
  • By manipulating the money supply and interest rates, the Fed conceals economic reality behind a wall of artificial price-signals.
  • During the "bubble," the consumer price index (CPI) did not accurately reflect the inflation that Americans were experiencing in higher costs of housing, health care and college tuition.
We had government "experts" telling us that inflation was running only 2% annually, even while housing prices soared, effectively pricing many young people out of the market.

In retrospect, we see that kooky "Dr. No" was prescient, and all the "experts" were full of crap.

1 comment:

  1. I think your description of Ron Paul's comments is applicable to him generally: kooky at times, but also getting some essential points correct.

    The housing market does need to be allowed to adjust. That may be easy for me to say because I'm still not likely to be upside down after a major adjustment, but it still means I will lose a few hundred thousand in equity. At first, I was pissed off at the lenders and borrowers both when the market tanked . . . until I realized my home's value would never have climbed to such dizzying heights in the first place had it not been for the easy money going around.

    Which is something I hear NO ONE talking about. Everyone recognizes that the easy money schemes were created to get more people into rapidly appreciating homes, but I have heard no one explain that the easy money also contributed to the crazy increases in real estate.