Posted on 10/12/2009 8:18:39 PM PDT by jazusamo
Back in the days of the Soviet Union, two Russian economists who had never lived in a country with a free market economy understood something about market economies that many others who have lived in such economies all their lives have never understood. Nikolai Shmelev and Vladimir Popov said: "Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others."
What does that mean? It means that a huge increase in the demand for ice cream can mean higher prices for catchers' mitts, among other things.
When more cows are needed to produce more milk to make ice cream, then fewer cows will be slaughtered and that means less cowhide available to make baseball gloves. Supply and demand mean that catchers' mitts are going to cost more.
While this may be easy enough to understand, its implications are completely lost on many people in politics and in the media. If everything is connected to everything else in a market economy, then it makes no sense to have laws and policies that declare some given goal to be a "good thing," without regard to the repercussions, which spread out in all directions, like waves that spread across a pond when you drop a rock in the water.
Our current economic meltdown results from the federal government, under both Democrats and Republicans, declaring home ownership to be a "good thing" and treating the percentage of families who own their own home as if it was some sort of magic number that had to be kept growing-- without regard to the repercussions on other things.
We are now living with those repercussions, which include the worst unemployment in decades. That is the price we are paying for increasing home ownership from 64 percent to 69 percent.
How did we get from home ownership to 15 million unemployed Americans? By ignoring the fact that there was a reason why only 64 percent of families owned their own home. More people would have liked to be home owners but did not qualify under mortgage lending standards that had been in place for decades.
Politicians to the rescue: Federal regulatory agencies leaned on banks to lend to people they were not lending to before-- or else. The "or else" included not having their business decisions approved by the regulators, which could cost them more money than making risky loans.
Mortgage lending standards were lowered, in order to raise the magic number of home ownership. But, with lower lending standards, there were-- surprise!-- more mortgage payment delinquencies, defaults and foreclosures.
This was a problem not only for banks and other lenders but also for those in the business of buying mortgages from the original lenders. These included semi-government enterprises like Fannie Mae and Freddie Mac, as well as Wall Street firms that bought mortgages, bundled them together and issued securities based on the anticipated income from those mortgages.
In other words, all these economic transactions were "interconnected," as the Russian economists would say. And when the people who owed money on their mortgages stopped paying, the whole house of cards began to fall.
Politicians may not know much-- or care much-- about economics, but they know politics and they care a lot about keeping their jobs. So a great distracting hue and cry has gone up that all this was due to the market not being regulated enough by the government. In reality, it was precisely the government regulators who forced the banks to lower their lending standards.
The other big lie is that this was a failure of economists and others to foresee that the housing boom would turn to bust and set off financial repercussions across the economy.
In reality, everybody and his brother saw it coming and said so-- including yours truly in the Wall Street Journal of May 26, 2005. As far away as London, The Economist magazine warned about the danger. So did many American publications and individuals. The problem was that politicians refused to listen. They were fixated on the magic number of home ownership and oblivious to the economic interconnections that Russian economists saw long ago and from far away.
That pretty much requires almost a complete change of Congress. Though I'm hopeful, I don't see it happening. You and I both know what's going to happen here. The Democrats are going to stumble and bumble their way through it, and then claim Keynesian economics worked, and the next disaster will be right down the road.
What we really need, in addition to different leadership, is educating the public about the actual causes and remedies, and that's not likely to happen withing the generation of the people that are responsible.
Unless this country has a collective epiphany, which also isn't likely to happen, then this is a nightmare that won't end in our lifetimes.
withing = within
This can’t be emphasized enough, because the perpetrators (perp-TRAITORS) are blaming Bush, Republicans - anybody but the real suspects.
“Exactly, and Dr. Sowell has been saying this right along.
Though the RATS ignore him they know he’s right.”
Frank and Dodd knew the sub prime market would implode. So did Goldman Sachs, who began to short the stocks of the companies that they were selling their poison securities to. Other bankers knew it as well, but decided to milk the market until it collapsed. The bankers and a few large companies are running this country now. Goldman Sachs and G.E. get whatever they want on the backs of the American taxpayer. G.E. virtually wrote the Cap N Trade legislation. These behemoths don’t mind Obama playing the little “left wing radical “Savior” as long as he plays ball, and does what he’s told.
You know I can remember a time when such corporate hijinks would have been rewarded with a Department of Justice investigation, and the culprits responsible frog marched out of their offices and into a nice cold jail cell.
I don't know. Paul Krugman was awarded the prize in Economics last year...
Yeah, that totally ruined my day. There are always duds, even for the hard science prizes. But they are still the highest honors in their field.
Excellent article. I only wish more people would read Thomas Sowell and learn. He is a great thinker, researcher, and, what is more, a truly wise man.
I don't know if that is true. But I have heard pretty much the same claim made about German industry and Hitler. In the end it was probably Hitler who held the whip, and his business supporters did what they were told. If some in business think they control Obama, they are apt to be disappointed in the future.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.