Here is a speech I gave yesterday, sort of a roundup of past and present with an explanation of what happened and is happening.
Source link: http://archive.mises.org/8790/on-the-housing-bubble-and-aftermath/
On the Housing Bubble and Aftermath
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Dr. Thornton,
I am of the understanding that the FDIC is broke in the same way as the Social Security Administration. That is, all the “excess revenues” from past years already were spent by Congress, leaving the FDIC with only IOUs (Treasury Trash). Thus, everytime the FDIC “takes over” a bank, the deficit is increased because there is no real savings backing up FDIC “insurance”.
Enjoyed the listen, Mark.
Hey, if you’re noticing early callers, mind this:
“the next major bust, if there is no major interruption such as a global war, will be around 2008.”
Fred E. Foldvary. 1997. The Business Cycle: A Georgist-Austrian Synthesis. American Journal of Economics and Sociology 56(4): 521-41, quote at p. 538.
An html version is available online at:
http://www.foldvary.net/works/geoaus.html
The quotation given above appears in slightly different wording in the conclusion.
The paper must have been written about 1995-96, so Fred called it a good 12 years in advance.
Dr. Thornton,
I enjoy your ability to deconstruct the complex and make it understandable.
During a discussion with a grad student I was asked, “Wouldn’t companies and banks anticipate and adjust to the Fed’s money creation? Does inflation necessarily cause ‘malinvestment’ when a learning curve can be overcome?”
My immediate answer was that entities affected had to deal with an asymmetry – that Fed inflation creates malinformation- that the intensity and reactions by all actors cannot be known before hand. I also said there was a moral hazard involved- that even if a company or bank knows of the destructive nature of inflation a rational choice would be to milk it as long as possible because those that don’t lose the most.
I have to say I am not satisfied with the answer I gave. What are my answers missing? And how does one answer the question “Is the ABCT deterministic?”
Thanks again for your accesible interpretation of the financial calamity, Dr. Thornton.
There is no real learning curve. Even if several people knew the ABCT, perceived correctly that credit conditions were too easy, and acted accordingly some other people would try to take advantage of the easy credit.
Basically, all the actors could have said no to easy credit but they didn’t. (I mean, having a centralized cartel displaces credit markets to a significant degree anyway.) But these decisions are subjectively made. It is the ABCT that explains it, aprioristically. It has nothing to do with determinism in human choice.
If all the actors turned-down the easy money, or what they perceived as a trap, then it would fit into an aprioristic explanation. Recently some banks received bail-out funds but are not lending and smaller or regional institutions that did not get into the mortgage game stand comparitively healthy.
Too bad failures are rewarded and frugals punished.
Thanks for the reply Dr. Thornton.
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