NYU Economist Nouriel Roubini, is quoted at length the Naked Capitalism blog. While the entire article is fascinating, this passage in particular is of great interest:
Sixth, the existence of GSEs….is a major part of the overall U.S. subsidization of housing capital that will eventually lead to the bankruptcy of the U.S. economy. For the last 70 years investment in housing – the most unproductive form of accumulation of capital – has been heavily subsidized in 100 different ways in the U.S.: tax benefits, tax-deductibility of interest on mortgages, use of the FHA, massive role of Fannie and Freddie, role of the Federal Home Loan Bank system, and a host of other legislative and regulatory measures.
The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.
Mainstream economics has largely ignored capital, at least in terms of its role in macro-economic phenomenon. Roubini here takes what is essentially an Austrian view of capital. Capital must be funded by savings; the savings must be invested; the quantity and type of capital determines labor productivity; consumption goods do ont increase labor productivity; and increasing labor productivity is a consequence of economic growth.
Roubini is a very interesting thinker to Austrians in that he seems to have almost discovered many aspects of Austrian economics on his own by common sense and looking at what is going on in the world in a curious way.
{ 36 comments }
He is an interesting thinker. In fact, I have used some of his material, including one of his YouTube videos, in my intermediate Macro class. His point here is that capital is not homogeneous, so simply increasing capital relative to consumption is not good in and of itself, contrary to the popular macro texts. Financial markets need to be allowed to determine its allocation. When its allocation is determined by the Fed, Fannie, Freddie, etc., workers suffer from lower wages, capital is wasted, and rent-seekers are rewarded. Otherwise productive workers are signaled to enter lines of work receiving that favorable capital flows determined by government. Though I used to consider Roubini “that other Turkish economist” (along with Dani Rodrik), he is actually the better one, and quite Austrian, although I have never read him quoting Hayek.
……..investment in housing – the most unproductive form of accumulation of capital …….
Housing is not any form of capital, houses are consumer goods.
Roubini is sort of like The Economist (at least The Economist in the past). Sometimes he sounds Austrian, but other times he is very Keynesian.
One should certainly read what he writes, but he is often wrong because of his Keynesian leanings.
I agree with Mikey, and have never considered a home a form of capital, but rather a long-lived consumption good. While a home is ultimately produced from the original factors of land and labor, it is not an input to a production process as is a true capital good.
However, with that said, Mr. Roubini’s point that Americans have spent significant amounts on their homes at the expense of investments in capital goods that increase productivity and economic growth is accurate.
“I’ve commented mathematical formalism in economics before (see here and here).
I will here aside from linking to these posts only add that mathematical formalism does not prevent bad ideas. You can express any theory, including communist ones, as a bunch of Greek letters and then differentiate them and pretend that this operation have somehow made it scientific. Far from stopping bad theories, mathematical formalism will help advance them because they will distract from the actual issue at hand by instead focusing on series of differentiated Greek letters.”
-well put.
In the past I asked whether the US gov’t should back Fannie & Freddie bonds (the prospectus has a red box warning stating we are in no way morally obliged to pay off on FM bonds).
So do we pay, or do we let the Japanese pay for our houses?
If we pay, the entire US balance sheet is impacted in a way that will increase Treasury rates for all the gov’t's “real” obligations. If we pay, we essentially screw the existing legitimate interests of T-Bond holders who have done nothing wrong. That’s not fair.
Capital is subjective, not objective. It’s easy to confuse opinion with strict sound economic analysis. There is no a priori reason that equipment and machinery are more valuable uses of capital (aka savings) than houses. But of course that’s par for the course for all silly epistemologically in error post hoc “I told you so” business cycle theories.
There’s no debt whatsoever that does not originate fully 100% from voluntarily transferred savings. Obviously, those savers preferred the debt promises to all other possible investments they could have otherwise made on their own.
Until recently, houses were highly subjectively valued as inflation hedges. But it’s silly, a pure broken window fallacy, to maintain the world is worse off net poorer with 2X houses than it is with 1X houses, just as it’s silly to maintain the world is richer, because oil costs more because it’s relatively more scarce, when there is only 3xOil rather than 4xOil.
Maybe, just maybe, “housing services to consumers” was a greater marginal utility use of capital savings than greater “productivity of labor” which possibly would only have had a very small effect on productivity at that time. The either/or possibility is not demonstrated. What about all the productivity gains from investment in capital equipment used to build those houses? Not to mention the labor of many millions of illegal immigrants, a much easier far greater return on improved marginal labor productivity than extra tools for say programmers.
But I can pretend I’m a good economist too by condemning all families that went to Disneyland for vacation rather than enrolling over their capital savings into knowledge productivity increasing economics classes at Auburn.
This results in the (for the sake of sarcasm) Marxist flip-side “malinvestment” of the existence of Disneyland, and movies like “Pirates of the Caribbean”, rather than more health care services and more renewable energy solar panel production facilities. These are typical awful fallacies which are perpetuated even by Austrian economists.
In the end, such analysis is just a silly confusion of differently subjectively valued ends. People don’t build factories of machines and equipment for the sake of building factories of machines and equipment. Mobile housing construction crews and machinery were a far better use of scarce capital savings resources, and we can look forward to soon reaping the benefit of surplus cheaper housing in exactly the same way we reap the benefit of cheaper higher quality televisions as more are produced.
Bob:
I don’t want nit-pick the point–but the guy didn’t come to these economic conclusions by mysterious “common sense” as opposed to some other way that more experienced Austrians have travelled. The technique–careful thinking–is the common thread. Indeed, it’s the common thread by means of which Austrian theory, despite its complexity, is actually ultimately accesible to a broader span of the intellectual spectrum. We have the merit (and, I believe, ultimate advantage) that our guys don’t have to “dazzle ‘em with brilliance” or “baffle ‘em with bullshit.”
In a certain sense, I’d disagree with the author over the matter of whether or not housing is a consumption good rather than a production good. It is clearly a bit of both, though largely in the consumption category. Of course, that minor quibble is in no wise meant as any sort of contradiction of the author’s basic fault-finding with the degree and manner in which housing has been encouraged and subsidized in so many ways to the detriment of more productive investment.
rtr:
The point is not that the higher spending on homes is at the expense of more productive allocation of income. Rather, it’s that the government, in numerous ways, skews the undoubtedly subjective perceptions of the public, virtually “steering” them to the choice sought by large numbers of the government’s clients in such matters.
gene berman,
Is it really government “steering” subsidy of the housing market, or is just net less overall taxation theft and regulation compared to other capital business lines? How are you sure higher property taxes don’t cause less vacations and other luxury goods purchases as opposed to less houses being built? The production of nothing whatsoever is not un-”skewed”. Why single out housing?
Of course government skews choices, but my point is government never skews choices to be undertaken that would not otherwise also be by definition increasing positive subjective value, and hence voluntarily undertaken.
Condemning MacMansions makes as much economic sense as condemning anything else which is produced. Given that houses tend to be the most immune to all sorts of legal liability, it would not surprise me at all to see ever bigger and ever more luxurious housing.
And housing is far, *far*, in a galaxy far far away, from being net “subsidized”. Maybe 6% commissions are subsidized, but positive subjective value subsidy for the average house owning consumers is far outweighed by the taxation, by the regulation.
Even today, we have a *huge* shortage of all types of housing which would exist in the absence of government interference in the market. There’s no remote possibility that we are more “overbuilt” than we would be in the absence of all government interference. Therefore, the “subsidy” is a net negative and not at all a “subsidy”.
test
rtr…. I have one question.
WTF is a “positive subjective value subsidy”?
This might be the worst post I have ever seen on Mises.org. Terrible.
rtr,
You say this:
“Of course government skews choices, but my point is government never skews choices to be undertaken that would not otherwise also be by definition increasing positive subjective value, and hence voluntarily undertaken.”
Okay – so you’re saying that the killing fields of Cambodia and the Nazi death camps of Germany were choices taken that would otherwise increase ‘positive subjective value’? At least that’s what you seem to be saying. You could start be being a lot more clear in what you are saying to make sure we can actually argue the points you are making.
“And housing is far, *far*, in a galaxy far far away, from being net “subsidized”. Maybe 6% commissions are subsidized, but positive subjective value subsidy for the average house owning consumers is far outweighed by the taxation, by the regulation.”
What do you mean, exactly? Housing is subsidized by lower tax payments, capital gains exemption, mortgage funding by two companies with a now explicit government guarantee, and dozens of government programs that help low income (and sometimes not so low income) people get mortgages with little or no down.
And you’re saying that state taxes on housing somehow equalize out all of that to provide a net no-subsidy, huh?
“Even today, we have a *huge* shortage of all types of housing which would exist in the absence of government interference in the market.”
How do you measure that? By the ever decreasing owner occupancy rates and the millions of empty homes across the country?
How could you even prove that?
What you can prove is this: The housing bubble was a huge and massive malinvestment of capital. This can be measured after the dust settles (and we are far from seeing the dust settle), but it is very difficult to do so. What you need to do is add up all of the profits and all of the losses incurred by everyone involved in the housing industry, including indirect losses through government subsidy and bailout, and see if the return on capital invested is much less than the average rate in the rest of the economy. If so, it was a malinvestment of resources, and we would be better off had it not taken place.
So the treasuries will be replaced by F&F mortgage securities. Then the dollar will be backed up by mortgage papers nobody wants. We have also tremendous overissuance of the dollar. I am just surprised that nobody realizes that this scam has been already done before. About 230 years ago John Law’s assignat was backed with confiscated church properties and it has huge overissuance. This blend directly lead to the French Revolution and then the introduction of the Guillotine as the rehabilitation of the era. People, prepare your neck!!
rtr,
Yes, there is no way of telling what different investments would have been made and how the structure of capital would differ today had the Federal Reserve and fractional-reserve banks not distorted the availability of credit and the interest rate through an expansionist policy that works around and despite consumer time preferences. That’s precisely the point–that the distortion of market indicators and information has led to a greater degree of capital investment that is not in line with consumer time preferences and their propensity to save. These malinvestments must rightly be liquidated, as they are unsound, unsustainable and wasteful. By all accounts, the artificial expansion of credit has led to a bubble in the housing market. I agree with your assessment that housing is still vastly unaffordable for most people, and that government intervention weighs heavily towards the negative (that is to say overall it has raised costs, and so we are seeing cheaper and cheaper quality housing at higher prices). But I don’t think this discredits the assessment that there has been a bubble in the housing mortgage market that has driven prices even higher until now.
This reminds of others who have argued something about how ‘cars were effectively subsidised by the Guvmint what with public roads and all’. Similarly, the argument could be also made ‘thanks public roads and cars, people live in suburban homes’. Without necesary individual transport, people wouldn’t be able to live far apart and instead people would be living in large high-rise buildings’ (which ironically would’ve been better for the environment). But rtr does raise a good point ‘what of people who go to Disneyland instead investing in stocks or a training course?’. It was said J.D. Rockfeller 1 docked a worker his $5 end-of-year pay when the worker used the money to take his family to an amusement park instead of investing for future returns. Similarly some Libertarians who talk of ‘rich/poor’ monks – monk who took a vow of poverty and therefore virtually all profits from their ventures was reinvested thereby enjoyed spectacular growth that most people, who don’t take a vow of poverty, wouldn’t.
TLWP Sam: “‘what of people who go to Disneyland instead investing in stocks or a training course?
You don’t see a difference between people doing what they wanton the one hand, and government trying to influence that decision on the other?
In a free market, one without government intervention, people are free to choose anything they want. They can burn their money if they want. But the state should not intervene to influence that decision. The main point of the article is that the government has intervened to influence the market so that people spend more money on housing than they would in a free market. The justification for such government intervention was that houses represent capital investment which is a good thing. Roubini was simply saying that some types of capital are better than others for economic development, and had the state not intervened, some of that money spent on housing, though not every penny of it, would have gone toward investing in capital that improves productivity.
After seeing Roubini’s full arguments several times, this is clearly a case of “broken clock syndrome”.
Roubin, a “broken clock”? He’s been consistent in his view of global imbalances over several years now, but largely correct in his main points. The system was unsustainable, and now it is breaking up. When were the 11 hours of the day when he was wrong? His analysis has been largely correct in most of its main points. -Robert
I’m sure that rtr knows exactly what we’re saying, but doesn’t think it’s ‘economically’ justified, and is trying to stir the pot. But if it’s all about subjective value, and subjective value leads to supply and demand, how can even he not see a problem with shortages or excess supplies that don’t meet up with the demand created by subjective value? It’s just the next logical step.
Jason Quintana, put a *net* in front of “positive subjective value subsidy”.
Just like rent controls result in apartment shortages, so too do all the taxes, regulations, hurricane and earthquake codes, environmental preserve designations, historical neighborhood building restrictions, neighborhood landscaping codes, government wars of destruction, and on and on and on, result in shortages of every type of housing. The cost of housing is much higher because of government interference than it would be in a free housing market. Many more people would have many more second and third vacation homes in the absence of government interference. The supply of housing would be much higher than it is today.
People might have cheap condos in the city during the work week which they stay in for a night or two (and visit for city events like football games and fireworks shows) and a house out in the suburbs for the rest of the time. And this is exactly what the very rich do, people like Hollywood actors; they have a big primary residence and multiple other residences in other cities, including condominiums in New York, Chicago, London, Paris, etc.
Jeremy, “the ever decreasing owner occupancy rates and the millions of empty homes across the country” would be eliminated if the prices were dropped by 90% (or whatever percentage), and none of them would be ripped up and destroyed except by government mandated “anti-blight” laws. The United States is still net more wealthier with 2X Houses than 1X Houses (NO MATTER WHAT THE NOMINAL PRICE). People were overpaying because of an artificial government interference shortage of housing.
The only people being net subsidized by government interference are RE agents with 6% commissions, licensed construction companies who have competition eliminated, and State and local governments who have more captive, less mobile, subjects they can extract higher taxes from.
The argument that there was a subsidized boom in housing is as ridiculous as an argument that there would be a subsidized boom in income, both nominal and real from government subsidization of income from tax deductions and Fed fiat printing presses. No, we are net poorer in all aspects from government waste and inefficiency. That means the supply of everything which is and would be subjectively valued is lower than it otherwise would be, houses included.
It’s awful economic analysis to believe there is a net subsidy in the housing market. It is epistemologically impossible to subsidize real income, real wealth, NET, for everybody. Houses are a big, if not the biggest, wealth asset for most people. Such a belief is as tooth-fairy-belief naive as a belief that the government can subsidize the quantity of oil nature has produced.
Technically financially yes. As rtr pointed out people splurging out on frivolities would be poorer than if they actually spent it on something meaningful skills that would further their productivity. Perhaps then some religious societies may be better off than totally free societies because people are forbidden/highly restricted from freely choosing self-destructives courses.
rtr ‘The United States is still net more wealthier with 2X Houses than 1X Houses’ … but they BORROWED to make those new houses, that are now worth less while their debt obligations havent correspondingly decreased… how is that wealthier? Not to mention what more productive use that money would have been better spent.
‘ That means the supply of everything which is and would be subjectively valued is lower than it ‘otherwise would be, houses included.’
Not so… I can dream up absurd examples but moon missions? the military? does anyone think we would have MORE soldiers without government?
Jeremy Wiebe: “the distortion of market indicators and information has led to a greater degree of capital investment that is not in line with consumer time preferences and their propensity to save.”
That’s an epistemological impossibility. Savings cannot magically be created out of thin air. And neither can investment capital resources be created out of thin air. They can only be traded from one person to another, from one use to another. That will only occur if what is received is valued more than what is given away, *ALWAYS*, in every single instance of voluntary trade, with or without government interference skewing of production possibilities.
fundamentalist: “had the state not intervened, some of that money spent on housing, though not every penny of it, would have gone toward investing in capital that improves productivity.”
Improves productivity of *WHAT*? Whatever is demanded as a subjectively valued end good. Exactly like, say, HOUSES.
With my new and improved Marxist labor productivity methods, our day shift ditch diggers can can dig ditches at twice the productivity, and our night shift workers can fill in those ditches at three times the productivity. Thus, the night shift ditch fillers can begin digging the new ditches before the day shift even arrives, to correct this day shift-night shift productivity “imbalance”. This will make the land more valuable by adding labor to it in the form of dug and filled in ditches!
Robert Blumen: “He’s been consistent in his view of global imbalances over several years now”
“Global imbalances” was one of the biggest, if not the biggest red flag for Ludwig von Mises for “iceberg of faulty economic analysis, dead ahead!” Unfortunately, he didn’t solve the conundrum, because he was wedded to fundamentally flawed monetary theory.
Michael A. Clem: “rtr .. is trying to stir the pot.”
Always.
That will only occur if what is received is valued more than what is given away, *ALWAYS*, in every single instance of voluntary trade, with or without government interference skewing of production possibilities.
True, every SINGLE trade occurs because both parties value the exchange more than not exchanging, but these trades don’t occur in a vacuum. People make these trades based upon their knowledge of all possible trades that they could make, under the current circumstances. The question then, is what are the circumstances and what has led to those circumstances? And what trades would have been possible under those different circumstances? Are you saying that economics has nothing to say about that?
Do you see a flaw, for example, in the argument about the change in circumstances caused by minimum wage laws and increases? I understand that Bush just signed a housing bill relating to the current mortgage “crisis”. Surely we can say something about how that will change the circumstances involved in house-buying?
Artificially cheap credit makes all investment/consumption activities look more “profitable” than they otherwise would, including some investments that are not self-sustaining. The government and the Fed are unable to do much to control what people will take a fancy to- in the late nineties, people overborrowed to overinvest in technology and the corresponding stocks, and in the oughts, they did the same with housing, and it is likely the same is happening in commodities today.
We are endlessly cycling from one bubble to another, and a particular bubble doesn’t reinflate until all the people burned by the last one are dead.
TLWP Sam: “As rtr pointed out people splurging out on frivolities would be poorer than if they actually spent it on something meaningful skills that would further their productivity.”
Saying they were “poorer” is completely false economic analysis, is a contradiction of the fundamental theorem of action. They are only poorer by some other distinct person(s) subjective valuation masquerading as objective valuation. The individual who chooses a Disneyland vacation over investing in Disney stock is by definition wealthier, by definition better off, by definition of subjective valuation *choice*. If every single person bought Disney stock instead of taking vacations to Disneyland, there would be no sales at Disneyland and the stock would be “worthless”* (except as a glorified piece of art certificate paper). All production, all capital resources investment, is aimed at satisfying some other person’s subjectively valued end.
*”Worthless” as in there will be no sales or profit from the underlying Disney business. But that doesn’t mean Disney shares couldn’t trade for any wild amount of “money”, based on dreams, hopes, expectations, or any psychological reasons whatsoever, without ever being a “bubble”, without ever being a “malinvestment”. “Bubbles” exist everywhere and always by definition of changing non-constant subjective valuation, by definition of trade, by definition of action. Nothing a priori precludes people from subjectively valuing their Tulips more than their Houses, or their Houses more than their Tulips.
Jonny: “but they BORROWED to make those new houses, that are now worth less while their debt obligations havent correspondingly decreased… how is that wealthier? Not to mention what more productive use that money would have been better spent.”
The supply of houses is up, the demand for and supply of fraudulent and fiat manipulated credit is down (way way down — trillions and trillions of subjective valuation of credit has vanished, evaporated into thin air, the opposite of how all subjective valuation extrinsically appears into thin air by human subjective valuation — from dust TO dust), why wouldn’t those houses be worth less? So does that mean each marginal unit increase in production of any good is a “malinvestment” because it is worth less than the previous prior existing marginal unit? It is not a priori known that the second house is less valuable than the first SUV or recreational boat. Such valuations can only be observed at the time at which they occur.
Credit promises are just as subjectively valued as anything else, like houses.
What about computer components manufacturers that BORROWED to make new computers, new monitors, each marginal unit of which is less valuable than the previous? So why plant more than one flower, why buy more than one car, why eat more than one meal per day, why build more than one house per family? Because they feel like it.
Because there was an artificial shortage of houses, there was a run on investing in and building more houses, in exactly the same way oil price speculation signals changing relative supply and demand between the present and the future. Huge numbers wanted to flip, to front run outbid people who would be in the market for a place to live. Building more was a perfect market solution to provide affordable housing. The market corrected the damage which was being caused by an artificial housing shortage.
Of course people who speculate at the top of a Mania will get burned if they don’t know what they are doing (or even just get unlucky). Do Austrians believe oil futures market speculators never lose money, and just all live together in peaceful harmony, at one with their brotherhood of exchange traders, sharing all the profits from each according to his needs from each according to his means? No! It’s cutthroat. If you guess wrong, you pay the penalty as determined by the market. Look around, this is the 1929 version of shoe shine boys flipping houses, instead of telling the bank CEO what to buy in the stock market. But be epistemologically consistent for Pete’s sake: if you’re going to complain about people losing their shirts in RE speculation, then maybe you should start picketing with the Marxists to shut down oil speculation futures markets and “globalism” trade. Somebody is *”wrong”*, every single day!
Of course the government exacerbates manias. Stock commissions used to be outrageous percentages of the trade at one time too, like RE today is 6%! Throw in massive lending fees, appraisers and mortgage underwriters actively and knowingly committing multiple trillions of dollars worth of fraud by pure Ponzi scheme classic Florida swampland swindling, and the market still signals new reality. The market price of housing is actively hidden to keep suckers in the dark. It was exacerbated and enabled by the artificial shortage of housing. So much for that false belief! Guess God must’ve built some more land.
Yes he seems to have grasped some parts of Austrian economics, or to use the technical term for this school of learning, “simple logic and common sense”.
If Crusoe and Friday neglected the mending of their fishing nets in order to build more and more elaborate treehouses for themselves while passing each other larger and larger IOUs scratched into coconut husks, would this not eventually lead to a time of deprivation and hunger?
I agree that housing purchases have been encouraged and subsized in many ways here in the US.
So it’s interesting to note, as Mish and others here have, that Fannie Mae has failed in its stated mission to make housing affordable (largely due to its very existence and intervention in the housing market):
http://globaleconomicanalysis.blogspot.com/2008/07/nature-of-fannie-mae-bailout.html
Still, I’m a little confused about Roubini’s stance on the whole housing bill and Fannie/Freddie bailout issue. Are his proposals “Austrian”-sounding, or are they interventionist?
In the blog post above, Roubini is quoted as saying that Fannie and Freddie creditors/bondholders should not be made whole (bailed out) while losses are socialized and spread to the taxpayers.
But in this article, Roubini was quoted as saying a housing bill was a “step in the right direction” but “doesn’t do enough”, and that government (or, taxpayers) would need to spend $1 trillion to “solve the housing crisis”.
http://finance.yahoo.com/tech-ticker/article/41423/Roubini-More-Than-1-Trillion-Needed-to-Solve-Housing-Crisis?tickers=FNM,FRE,XLF,WM,WB,WFC,BAC
Can anyone reconcile these views and summarize what Roubini is/was really advocating?
Yancey Ward: “Artificially cheap credit makes all investment/consumption activities look more “profitable” than they otherwise would, including some investments that are not self-sustaining.”
There’s no such thing as artificially cheap credit. There is such a thing as an artificial monopoly controlled shortage of fiat “money”. That fiat paper money has original subjective value because of non free market government declared “legal tender”. There is a shortage of that “money”, because the government prohibits “counterfeiting” and competing money supplies which would otherwise render that fiat paper money worthless in a free market. Thus something which is infinitely non scarce is pretended to be scarce by government violence manipulation. This is inherently volatile, and amazing it hasn’t completely blown up world-wide before now. When it does blow up, it will be many times uglier that the current housing crisis and Great Depression combined for all those who believe government fiat money has stable inherent intrinsic non volatile value. It will kill worldwide trade, it will kill “stored” subjective value in the credit, equity, money and bond markets. It will kill trust, which will take time to rebuild with a real money supply. And it will kill a few billion people who starve to death and die from warfare in the meantime. Everyone will suffer, not just those who are instantly wiped out by holding fiat instruments. This may be what indeed lies in wait beneath the water of the current housing crisis tip of the iceberg.
The fiat “money” “credit” is thus artificially *EXPENSIVE*, not cheap. It represents a non economic non scarce *shortage* of what would otherwise be infinite in a free market. But yes, contract regulation government enforcement does make the initial extension of credit “cheaper” for the lender (and hence “cheaper” for the borrower), until you can no longer get blood from a stone borrower in default. But even those who extend credit are aware of *RISKS* by setting interest rates, credit scores, and collateral down payments; they have at every moment the choice to not trade savings to debtors. It is only because contracts are enforced by government interference in the free market that any credit at all is extended to any significant degree, and thus government interference in the market is the sole reason that debt exists to any significant degree. So in the end, NET, credit is only cheaper in the sense that “withdrawing” a million dollars from the bank by threatening the bank with a gun is “cheaper” than earning it the hard way. In other words, credit is inherently expensive, risky, less efficient, and less competitive to free market monetary trade. That’s why it’s forced into the market by government interference in the market. So it is not cheaper by definition of requiring unnecessary enforcement costs.
That’s the international banking conspiracy to enslave through debt and government coercion; they’re about to get a harsh reality wake up call that it will fail as millions and millions of people just walk away from their loan obligations in the exact same manner as corporations declare bankruptcy to “reorganize”. The fact that people can just walk off with extended credit with no recourse whatsoever for the lender in a free market, is a market protection against debt slavery, and a market signal toward present tense trade exchange of one thing for another.
But this does not make “investment/consumption activities look more “profitable” than they otherwise would”, it makes debt interest more profitable than the alternative investment/consumption activities which would otherwise take place by the original savers. The bank scalps a locked in risk limited interest rate, the savers scalp a locked in risk limited interest rate, and everyone else rolls a roulette wheel of profit winner or debt slave loser. But the same best marginal investment activities before capital savings are traded to debtors are the exact same best marginal investment activities after capital savings are traded. There is no “malinvestment” distortion whatsoever, ever.
Rtr – the bearer of doom and gloom? Billions will die when everything comes to grief? Perhaps because only simple farming, hunting and gathering are the only long term stable ways of living – civilisations have been consistently good for a few centuries or so before going *POP*. Perhaps another way of looking at it is to say there are at least 5 billion who wouldn’t have been born it if weren’t for modern technology. There hasn’t been any guarantees made by anyone that technology goes forever upwards and life in the year 3000 might well look more like life in the year 1000 than anything depicted in Futurama. So what? You might get even unluckier and modern societies might not belly up at all.
Rtr, after reading some of your comments again I think that you have fallen into the trap of over-emphasizing subjectivism. George Selgin’s Praxeology and Understanding might be appropriate: http://mises.org/store/Praxeology-and-Understanding-P524.aspx
rye, I guess the recent development makes you THINK.
rtr, I guess the recent development makes you THINK!
he agrees with austrians on the causes, but he advocates extensive government intervention as a remedy. Hyman Minsky was another Keynesian who sounded Austrian. But, like Roubini, advocated big government to avoid the affects of the “hangover” that Austrians seem to think is morally necessary. What Austrians can’t seem to grasp is that someone needs to insure those who are negatively affected by downturns in the investment cycle – especially those who didn’t have anything to do with the poor decisions in the first place. In fact Austrians don’t even have an explanation as to why a collapse in investment should affect the real economy. Hyman Minsky certainly did.
@simmmo “In fact Austrians don’t even have an explanation as to why a collapse in investment should affect the real economy.”
Wow, now that’s a bold statement to be making here! I guess you’ve never heard of Mises’ crack-up boom? Then there is your idea that the real economy is somehow removed from levels of investment within it with both having a life of their own, only tangentially affecting one another.
See, it isn’t so much that collapsing investment affects the real economy, as it is the real economy affecting the demand for investments. While the fake economy can keep spewing out unneeded houses for years on end, the real economy recognizes the market saturation, thus collapsing demand for houses, thus collapsing prices for them, thus collapsing investment as new construction is no longer needed. Does anyone honestly believe that building even more of them helps anything?
To insist that investment itself creates the demand, is to put the cart in front of the horse. I can invest millions in a widget factory, but if no one wants/needs them, eventually my investments in this endeavor will collapse.
Guess what? That’s a good (read: moral) thing, as we don’t need to waste scarce resources on unneeded widgets. Instead, these resources can be used to prevent further negative downturns in the investment cycle (investing where there is true unmet human needs), insuring that we all are better off as a result. What it appears that you can’t grasp is that the “hangover” you fear is the very insurance needed to protect the innocent (not to mention restrain the guilty).
Notice, that like Robert Blumen’s comment, my explanation isn’t moral (as in that’s how it should be), but it just works out that way (that’s the way it is).
Taking the hangover analogy and the ABCT theory to its logical conclusions, one is left with the idea that the only way to avoid a hangover is to avoid drinking. What the wanna-be moralists attempt to do though is to avoid hangovers by staying drunk. Like crack-up booms, these short-sighted attempts to avoid reckoning with reality can never come to a good end. All they can do is numb you to the oncoming destruction, leaving you even more helpless when it arrives.
The difference between the wanna-be moralists (but we have to do something!) and the Austrians can be summarized with a single point. Recognition of the fact that all actions have consequences, and one just can’t manipulate the world to their liking. Instead the world has to be taken as it is.
@simmo:
1. “the “hangover” that Austrians seem to think is morally necessary. ”
The Austrian theory is not a moral theory, it is a theory of cause and effect. The liquidation period is not “morally” necessary. If the economy is going to produce goods that are consistent with consumer preferences then there must be a liquidation. There is no morality involved in this. This is only cause and effect. There is no concept of punishment or justice or anything like that.
2. “What Austrians can’t seem to grasp is that someone needs to insure those who are negatively affected by downturns in the investment cycle – especially those who didn’t have anything to do with the poor decisions in the first place.”
The Austrian theory explains how the business cycle is generated by monetary factors. As I said it is not a moral theory, it is a theory of cause and effect. There is nothing in the business cycle theory that says that the people should or should not be insured against the effects of downturns.
Now most Austrians don’t advocate government social welfare, but that is not because the business cycle theory says so. The business cycle theory is a theory of cause and effect with no moral prescriptions. To the extent that someone says that people should or should not get certain types of insurance because they are deserving or the needy should be helped or some other reason, that is a moral/political theory, not an economic theory.
I should point out that the ABCT shows a path to eliminating the business cycle altogether. Most Austrians would say that it is better to eliminate the problem than to try to figure out how to help the people who are harmed by it.
3. “In fact Austrians don’t even have an explanation as to why a collapse in investment should affect the real economy” It’s difficult for me to believe that anyone who is familiar with the theory could make this statement. The theory is all about how changes in the monetary system are transmitted to the real economy.
4. Re: Minsky, I did a blog post on Minsky a while back. Things work the way he outlines if you assume that you have a fractional reserve system and a central bank.
Comments on this entry are closed.