To fix housing, less government intervention needed

Senator Catherine Cortez Masto is now saying that one of the biggest issues facing Nevadans is a lack of affordable housing. Senator Cortez Masto says that HUD Secretary Dr. Ben Carson isn’t doing enough to help create more affordable housing. See: But is Senator Cortez Masto’s indictment legitimate?

“The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing consequences of that not merely for one group, but for all groups.” -Henry Hazlitt

Far too often, politicians in Washington are plagued by myopia. Rising prices are not synonymous with economic growth, and falling prices are not synonymous with economic decline. Genuine economic growth tends to beget falling prices. Yet Senator Cortez Masto and her colleagues have supported government schemes to combat falling prices, i.e. price fixing. There’s a paradox in that politicians have sought to combat falling real estate prices while simultaneously complaining about a lack of affordable housing.

It’s the effort to prop up prices through stimulus that’s prevented the housing market from clearing. People have lost homes because homes are unaffordable, not because they are too cheap. Thus deflation is the cure, not the problem. What sense does it make to provide somebody with a cheaper mortgage — by interest rate manipulation through loose monetary policy at the FOMC — on a more expensive house that costs more to maintain? But that’s the aim of present policy. What sense does it make to stimulate more home building when housing isn’t clearing the market as is?

No matter which way the government inserts itself into the housing market, this diminishes the need for sellers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). Whether the government buys up bad mortgages, bails out the homeowner or the bank, this interferes with the price mechanism. If we continue down the current policy path, one will have to be politically connected to get an “education,” a job, healthcare, and a house!

Suppose there’s a shop owner whose inventory is piling up because nobody can afford to pay for his prices. What does the shop owner have to do? Lower prices. But suppose the government inserts itself into the picture and subsidizes the shop owner. No longer is the shop owner’s sustenance dependent upon having to satisfy consumer demands, thus diminishing the need to set market-clearing prices. Within the construct of the unhampered free market there can’t be price gouging any more than there can be wage gouging, since vendors can’t short inventory at prices above what consumers are both willing and able to pay.

Let’s try another scenario. Suppose the government distributed “credits” or “vouchers” to this shop owner’s customers. This would be perceived as an “enlightened” form of welfare for the shop owner’s customers. However, this is yet a different way to subsidize the shop owner, by letting the shop owner sell at artificially high prices. A move like this prices the poorer non-recipients of “credits” or “vouchers” out of the marketplace. No surprise that education and healthcare — two of the most government subsidized cartels — have also had the highest levels of price inflation. This begets the erroneous perception that the problem is a dollar shortage for the one who didn’t receive “stimulus.”

It’s the subsidies and stimulus that have priced the poor out of the marketplace. Rather than understanding that it’s the “help” that has hurt us, the mistaken conclusion is that we need more subsidies and stimulus.

I’ve always said that, by rights, the impoverished belong to the free market movement. With the government as large as it is today, would it not be a fair assumption that many people who are poor are so precisely due to big government, whereas many people who are wealthy are so precisely due to big government? You see, big business uses big government to manipulate the marketplace on its behalf.

The flawed assumption made by some progressives is that big government is somehow less dangerous than big business. This begets the erroneous conclusion that the problem is an absence of regulation. It’s paramount to understand that we can’t regulate away insolvency. We can’t regulate away past mistakes. But we can regulate everybody except the big cartels out of existence.

Ludwig von Mises and Eugen von Bohm-Bawerk saliently articulated how labor can’t increase its share at the expense of capital. Nobody can argue against capital without arguing for a reduction in their own standard of living. Thus the problem for the progressive should not be with capital, per se, but that capital is so inaccessible to the common person.

Why is capital so inaccessible to the common person? Every tax, every regulation, every government program drives up the cost of capital. Politicians love this, because they get power. Big business loves this, because it creates barriers to competition. Big government creates monopolies, as a monopoly is a state of imperfect competition, and imperfect competition is begotten by government interference in the marketplace.

The situation with housing is no different than that of the shop owner I described above. In a market unhampered by government, sellers are sustained by selling inventory. When the government inserts itself into the picture, sellers are no longer dependent upon having to satisfy consumer demands by selling inventory. Sustenance is disconnected from the satisfaction of consumer demands. In the case of housing, the government and the Fed have subsidized the loan market to hold back inventory. See:

Simultaneously people are living in tents. The mission of politicians in Washington is literally to keep people homeless. Politicians are little more than kleptocrats masquerading as philanthropists. So long as the government keeps trying to prop up prices – as it has done with healthcare and education – housing will become increasingly unaffordable and the market won’t clear.

Anything that contributes to sticky prices and/or wages will prevent the market from clearing. Economic recovery rests upon a smooth-functioning price mechanism, where the market can discover real prices. How is Senator Cortez Masto or anybody else supposed to know what prices of everything are supposed to be? Would politicians mind telling me what housing prices are supposed to be? Should they be higher or lower? And if policy makers can’t answer this question, how can they possibly set sound policy?


Myth: The problem is “toxic” assets (e.g. mortgage-backed securities) which have created systemic risk

When a hospital can’t collect payment, the hospital sells this debt to a collection agency. This doesn’t create booms and busts. The risk is asystemic unless the government bails out every debtor and/or creditor.

Myth: Present problems were caused by bad lending (i.e. sub-prime loans)

Promiscuous lending is a symptom — not a cause — of economic conditions. Take bad lending to its own logical conclusion: Creditors give away money as an act of charity, getting nothing in return. Does charity cause booms and busts? No. Promiscuous lending is a symptom of loose monetary policy at the Fed, which tricks the loan market into consummating unjustifiable loans.

It’s primarily through FOMC operations that interest rates are determined (until the Fed loses control, which will eventually happen). By expanding the money supply, this increases the supply of loanable funds, but without an expansion of genuine savings. In doing so, the loan market appears to be more solvent than it truly is, tricking the loan market into consummating unjustifiable loans. This artificially suppresses nominal interest rates below their natural level (i.e. where they should be pursuant to the true supply of savings). By expanding the money supply, this allows debtors/borrowers to pay creditors/lenders with devalued dollars, thus lowering the real rate of interest.

The essence of a credit transaction is an exchange of a present good for a future good. If there are no present goods (i.e. savings, which aren’t created on a printing press), then credit has to be curtailed. The problem in that case would not be a credit crunch, but a savings crunch. Investment can only come out of savings because producers must consume in order to sustain the process of production. In order for the baker to make more bread, the baker himself must eat. Thus somebody must forego present consumption in order to fund credit expansion.

The rate of interest is the discount rate of future goods against present goods. An example would be what an investor pays for a printing press. Suppose the printing press will generate $500,000 in net income throughout a ten-year life. The entrepreneur will certainly not bid up the price of the capital equipment to $500,000. The entrepreneur is willing to invest, say, $200,000 for the printing press and the vendor is willing to part ways with the printing press in exchange for an immediate $200,000. The entrepreneur and capital equipment vendor mutually settle upon $200,000 — a sum far less than the $500,000 — in exchange for the printing press.

How much present income (i.e. present goods) is an entrepreneur willing to invest in order to garner $500,000 in future net income (i.e. future goods) over a ten-year period? Reflected in the transaction is the rate of interest as determined by time preferences. Interest rates represent an agio on present goods since present goods are more valuable than are future goods. A person would rather eat an apple today than eat an apple ten years from now. Interest rates must be set pursuant to the true supply of savings and are determined by time preferences. If everybody wants to consume without saving, then interest rates must rise to reflect time preferences.

There is no right way to extend credit at negative real rates, which is a negative rate of return in real terms. It’s a calculus for the loan market to go bust. Any person, firm, or institution (e.g. government) that’s dependent upon inflationary credit expansion is, by definition, insolvent (i.e. a non-income generator). Failure has to be an option for bad business decisions. That’s the check on excessive risk taking.

Capital naturally gravitates to lower priced, higher-yield economies. It’s called arbitrage. Artificially low interest rates engenders capital outflow. Capital goes racing overseas. The problem isn’t a dollar shortage, but a dollar leakage. The dollars are out there; they’re just piled up in foreign reserves. The way to repatriate these dollars is for the Fed to tighten, interest rates rise, prices collapse to reflect wages, which will then beget capital inflow thus lowering the natural rate of interest. If I give you $10 in exchange for a book and you turn around and give me that $10 in exchange for a DVD, the real means of purchase for the book was the DVD and the real means of purchase for the DVD was the book. Increasing the quantity of dollars creates no benefit for the economy.

If the Fed tightens, while it’s true interest rates could gyrate upwards in the short term, the market wouldn’t take very long to append a deflation agio onto rates by lowering rates, since the real rate of return would come from an increase in the purchasing power of the dollar.

Myth: The FDIC is good for depositors

The FDIC offers deposit insurance for bank customers, which is really a backdoor way to bailout insolvent banks. Could you imagine being able to run a ponzi scheme (e.g. fractional-reserve banking), knowing that when your insolvency is exposed the government will pay off your customers (i.e. a de facto bailout of you)? This creates yet another layer of moral hazard on top of the central bank injecting “liquidity” into the loan market. Thus the FDIC’s true purpose is designed to keep the unsustainable intact.

Needing to insure bank deposits should raise questions in and of itself. Unlike natural disasters, economic risk can’t be pooled. It’s one thing to guarantee one’s solvency should they get wiped out due to, say, a flood. It’s quite another thing to guarantee solvency, per se. It’s impossible to insure against economic miscalculation and loss. In the insurance industry, this is referred to as speculative risk. If I were to go into business and you offered to insure me against business failure, by underwriting and assuming the risk, you become the true entrepreneur.

The FDIC (insolvent) is backed by the Treasury (insolvent) which is backed by the Federal Reserve (insolvent). The Federal Reserve is backed by a printing press, which is backed by the savings of Americans. Not only is the concept of insuring economic risk altogether chimerical, but there’s a reason why only a government-backed entity would offer insurance to banks. Inflationary (as opposed to non-inflationary) credit expansion makes banks inherently insolvent. Demand deposits are payable on demand, while banks are lent long. Thus the time structure of assets and liabilities does not match.

At the end of the day, the FDIC/Treasury/Federal Reserve (all three of which are insolvent) can guarantee depositors pull money out of their bank, but there’s no guarantee of the currency’s value. By guaranteeing solvency, this places the currency’s value at risk. Deposits are guaranteed in nominal terms, but not in real terms.

By scrutinizing the role of the FDIC more closely, you should see that its entire purpose is keeping the good ole’ boy network intact, leaving Americans with nothing. If the free market were allowed to function, the government’s role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank’s creditors — i.e. its depositors — would become receiver for the failed bank’s assets. Depositors should be senior to all other creditors. Thus, in the event of a bank run, depositors have the first legal claim to a bank’s housing inventory.

What does the insolvent FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank’s assets from its depositors by becoming receiver for a failed bank’s assets. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies.

So we can see this sleight-of-hand trick, under the guise of protecting depositors, transfers real assets (i.e. housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Fed “liquidity.”

There’s no way the FDIC/Fed can guarantee the solvency of the banking system or depositors, which will destroy the currency, thus destroying the very depositors – i.e. anybody holding dollars – those institutions are supposedly designed to protect.

The solution, then, is to put a failed bank’s assets into the receivership of its depositors. Any other efforts to prop up the housing or bond market will prevent the market from clearing and block those who have already lost homes from ever regaining possession. We are now doing to the housing market the same thing that has already been done to healthcare and education.

I would submit to you that we would all be better off the less government intervenes in the marketplace, no matter how well intentioned is the intervention. The less politicians do, the better off we will all be. Politicians spend a great deal of time promising to fix problems that they created in the first place. The “fixes” beget more problems. Senator Cortez Masto is no exception. Everything Senator Cortez Masto has supported has made housing increasingly unaffordable.

For those who have lost homes: If you want to figure out how to get your homes back, then make an inquiry into where they’ve gone. The Fed is sitting on over $1.5 trillion worth of mortgage-backed securities. We can go a long way toward saving the dollar, creating affordable housing, and getting people back into homes if politicians like Senator Cortez Masto fight to compel the Fed to disgorge the mortgage-backed securities on its balance sheet. Any other plan will engender homeless people and peopleless homes, which is why Senator Cortez Masto is the wrong barrister with the wrong indictment of the wrong suspect.

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