Patrick Barron
Forget all the pronouncements from Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke. Their attempts to explain how monetary expansion in the form of a government bailout of Fannie and Freddie will cure the subprime lending crisis is as scientific as a witchdoctor’s explanation of how his chants and powders will chase away demons. The government is following the same monetary policies it pursued to such horrific ends during the Great Depression of the 1930s. At that time of falling prices in general, not just housing prices as now, the government passed the Wagner Act, granting special privileges to labor unions which forced major unionized industries to negotiate with them. This had the effect of raising the cost of labor in the face of a general fall in the price level. Like any other overpriced good, the demand for labor shrank dramatically. But rather than rescind the Wagner Act, which was one of the major causes of massive unemployment, British economist John Maynard Keynes convinced governments around the world to inflate their currencies. This had the effect over a very long period of time of causing all other prices to rise, as the market attempted to restore the relationship of the cost of labor to all other prices within the market. Overpriced labor’s purchasing power was gradually sapped away. Wages weren’t reduced, but all other prices rose, which had the same effect.
That will be the result of the present administration’s monetary stimulus efforts. It will not allow housing prices to fall, so that the market can re-establish the proper relationship between the cost of housing and all other goods in the market. That would cause pain in the politically connected businesses that benefited for so many years from the boom in real estate. Instead it will create the conditions for rising prices generally over the next several years. Already this process has started, with energy and food prices leading the way. Austrian school economists know that the price level is not a pond that rises and falls in a uniform manner. Excess money enters the market at certain points, causing prices to rise in certain industries and certain parts of the country. Plus, all other factors affecting an economy are still at work. But over time all prices will be higher than they would have been in an uninhibited market. Then we will have become inured to high priced housing because the prices of everything else will be much higher too. More
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