The market has been working for the last three years to correct for the housing bubble caused by the Federal Reserve. Government intervention over the last year has been an impediment to the correction process. In the absence of these interventions and the promise of even more, the correction process would be much further along and more resources would have been reallocated and the recovery process would already be well underway.
Home builder stocks began their correction in late July of 2005 signaling the end of the housing bubble. I knew one local home builder who sold off his inventory of homes and left the industry at this time. By this time I was receiving calls and emails from prospective home buyers asking if they should still buy given what they had read on www.Mises.org
Off course the mortgage broker firms that were hawking all sorts of mortgage “products” were forced out of business long ago. They exited without much fan fair. It was a market correction to a problem brought about by the Federal Reserve. Right before they started their exit the then Vice Chairman of the Fed, Ben Bernanke, said that regulators had looked into the mortgage market and that everything was fine.
More recently, home builders continue to downsize, bad banks are failing, and the financial retrenchment has reached Wall Street. Hedge funds now see their glory days in the past, and once prominent Investment banks that were extremely leveraged have seen their risky schemes come undone. Efforts to bailout and save these firms have only delayed the recovery.
The government schemes known as Fannie Mae and Freddie Mac have also been revealed as irrational. Public-private partnership like this are extremely dangerous and they became the conduit to hiding the risks of the housing bubble. It would have been far better for the government to force them into bankruptcy rather than “conservatorship” which puts the taxpayers at risk and perpetuates their danger to the economy.
Finally, the derivatives markets is coming undone. Once touted as a way to eliminate risk, these “financial products” have been revealed as a dangerous illusion. Hedging strategies are fine and good, but Wall Street used these new methods to take on ever increasing levels of risk, not to mitigate existing risk.
The rush to bailout Wall Street must cease and be reversed or they will bailout American into the next great depression.