Posted on 03/08/2012 5:57:09 AM PST by SeekAndFind
In reaffirming its near 0% interest rate policy for another three years the Federal Reserve averred that this was necessary to revive the housing market, which, in turn, was necessary for the economy to revive. House building and the buying and selling of existing homes are meaningful parts of the economy. More important, from the Fed’s perspective a house is the biggest asset for millions of people; therefore, higher values mean owners will be more likely to spend.
This reasoning is arse backwards.
A strong economy—and minimal government interference—would rapidly revive the housing market. People who want to buy houses, which includes most of us, buy them when we can afford to do so. Only during the Fed-created bubble were millions of people with insufficient incomes purchasing homes with mortgages that were far beyond their capacity to service.
Let’s hammer this point home: Government and Federal Reserve “stimulus” for housing won’t put our economy on a vigorous and sustainable growth trajectory. Other things—sound money, low tax rates, less spending, repealing ObamaCare and Dodd-Frank—will.
The Fed’s reverse reasoning is not the first instance of this confusion of cause and effect. The first big occurrence came in the autumn of 1929, when the stock market crashed as the trade-destroying Smoot-Hawley Tariff began making its way through the congressional legislative mill. President Herbert Hoover thought that by propping up wages the U.S. could avoid an economic contraction. He called major business leaders to the White House and got these moguls to agree to keep wages at current levels and not engage in layoffs. Like Bernanke with housing, Hoover didn’t grasp the fact that wage levels reflect market conditions. Keeping them artificially high doesn’t create prosperity. Astonishingly, these CEOs kept their word. Nevertheless, the economy went into a tailspin.
(Excerpt) Read more at forbes.com ...
Obama’s half brother lives in a ‘cheap’ house.
GREAT article! Thanks! Bookmarked!
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” - - - Despite this sorry experience, Franklin Roosevelt’s Administration committed a similar error in the 1930s when it actively encouraged militant unions to extract huge wage agreements from the auto companies and other industries. Instead of stimulating the economy, those artificially high labor costs contributed to the mini-Depression of 1937–38. FDR also pushed through the first minimum wage law, destroying numerous jobs for unskilled workers.”
Remember? “Those who cannot learn from the lessons of History are doomed to repeat them.” Harry Truman.
Just think how many times the error has been compounded by raising the Minimum Wage!
“Just think how many times the error has been compounded by raising the Minimum Wage!”
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I am NOT a supporter of minimum wage, I think the obvious answer to those who support it is, “Well, if you think it works why don’t we raise it to at least a hundred dollars an hour so we can all drive a Mercedes and live in a mansion?”
Having said that I would add that I don’t think the current rate is doing a lot of harm now as long as we don’t go nuts and jack it up by some big amount tomorrow. I live in a relatively low wage area and I don’t think many are working for minimum wage. It seems that people either make a little more or don’t have a job. Eight dollars an hour is about the lowest advertised wage offer that I have seen lately. If the current minimum were to be lowered I don’t think it would have any real effect.
Gee. I thought letting me reap the benefit of my effort we motivate me to be more productive! Guess I will just go back to sitting on the porch enjoying the weather, after all when The Won fixes the economy I can just live off the increasing value of my house...
Keynesian economics in ALL its forms is ass backwards.
Housing prices got to levels almost twice what they should be by 2007, and need to fall 40-50% from the highs to reach equilibrium, all things equal. And the steady rise in prices wasn’t due to the Fed, but to other DC policies, like the tax policy on sale of a house (no tax), and DC’s encouragement (both Dems and Reps) of Fannie Mae and Freddie Mac to lend to the hilt, the consequences be damned.
The only way out of this is to either bankrupt (or lock in) most of the homeowners who are way underwater (or will be when housing finally bottoms out) and the banks who lent to them, UNLESS the Fed gooses the money supply and doubles the price level over the next few years. That process is well underway, and should be accomplished by around 2016-1018, at which point the buyer of a house in 2007 might actually be able to sell it at a profit.
Blaming the Fed for the Housing Boom and the resultant crash is nonsense. If easy money had caused the boom, we’d be seeing a terrific boom right now. The boom was caused by misdirected money and lousy tax policy and those who caused it now point their fingers at the Fed.
However, when we’re all griping about rapidly escalating prices on everything else, which is now underway, the Fed will deserve all of the credit, or discredit, for that one.
banks generated paper in order to have product to sell in default swaps.
Banks should have principle reductions to eliminate the inflated portion of the loan.
the new program is a joke and does nothing.
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