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Source link: http://archive.mises.org/8903/markets-need-time-not-more-poison/

Markets Need Time, Not More Poison

November 6, 2008 by

The present crisis is scary, but only because no one knows what crazy new scheme the government will introduce every other day. Resources were invested improperly during the housing boom, and the economy needs time to heal itself. There is no way around this fact. The sooner the government gets out of the way, the sooner recovery can begin. But even “free market” media such as the Wall Street Journal cling to Keynesian pump-priming, which — by the media’s own admission — didn’t help Japan and in fact caused the housing boom. FULL ARTICLE

{ 10 comments }

Greg November 6, 2008 at 9:54 am

I agree with you on the root cause, but the problem expands further into the market. But if you look carefully at the mortgage rates over the past 10 years, they have not moved that much. If the real estate market was just a market of people buying homes to live in and builders were building homes just for these people, our present situation would be a lot different. The problem expanded by the demand for mortgage backed securities as the value of these investments soared and their ratings remained high. Plus we saw the development of indexes like Case-Shiller and countless number of real estate investment trust that gave investors new avenues to pour money into these markets. It didn’t take long until builders were building homes for people they never met and never moved in.
The same applies to almost every commodity on the market from oil to wheat. And the correction is taking place now.
The problem now is not the rate of interest, it is the need to liquidate to cover margins. Once these people take these losses and move on, the problem will correct itself.

Bill Anderson November 6, 2008 at 10:01 am

I think Bob was correct in citing Orwell to describe Janet Yellen’s statement. All that training she has — and even being married to a Nobel Laureate — has done her no good at all.

Ah, yes, our friend, inflation!

StatusQuoJoe November 6, 2008 at 10:06 am

A wise man once told me:

Fire and credit are both kind servants and cruel masters.

Manageable inflation? Manage a 4 alarm fire by pouring more gasoline on the fire?

Stanley Pinchak November 6, 2008 at 10:21 am

Bill Anderson,
I too am trying to wrap my mind around that statement. The closest I can come to making sense of it is to compare the supposed bogeyman of too low of inflation with the decrease in real cost of goods under the gold standard. If this is what the author is referring to, sign me up. I will take gently falling real prices any day. The mindset that inflation is good is extremely myopic and discounts all of the negative aspects that it brings out in finance and society in general. I admit that if society of its own volition felt that debt were a good state to be in and that high time preferences the norm, I would be disappointed, but I could nothing but attempt to educate those around me to the foregone opportunities that these choices bear. However, I will tirelessly oppose a government policy of inflation that encourages these values, which stacks the deck against thrift and robs those on fixed incomes. If Dante were to write a modern version of his classic, proponents of inflation would be relegated to that part of hell where they, themselves were dependent on fixed incomes and swimming against the current in a highly inflationary setting, where trying to save and invest amounted to breaking even in the best cases.

Eric November 6, 2008 at 11:33 am

When I was about 10 years old my father showed me an article in the business section of the Philadelphia Bulletin. He went through it paragraph by paragraph and said at the end, “So this article is pretty much saying that the market will go up, unless it goes down or doesn’t change”.

His conclusion was that if I wanted to find truth in the newspaper, stick to the sports section where they report the previous day’s ball scores.

I see no reason to believe that has changed in the last 50 years.

Mike D. November 6, 2008 at 12:09 pm

Bob and Bill
Professors – isn’t what Janet Yellin’s describing just a consequence of fiat money? If I understand things correctly, in our fiat money system money is created out of thin air when money is borrowed. This increases money supply relative to the supply of goods, by definition inflation, which eventually leads to higher prices. If all loans paid off, wouldn’t the money supply contract and we would have de facto deflation?

Dick Fox November 6, 2008 at 12:12 pm

Janet Yellen has got to be the best comedien on the Federal Reserve Comedy Circuit. Here is info on the speech where she told this latest joke.

Speech to the Silicon Valley Chapter of Financial Executives International
Palo Alto, CA
By Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
For delivery Tuesday, October 14, 2008, 7:00 PM Pacific time, 10:00 PM Eastern

http://www.frbsf.org/news/speeches/2008/1014.html

Greg November 6, 2008 at 1:21 pm

Just listen to Sen. Dodd, interest rate cuts and money supply is not our future problem. He laid out the need for greater regulation and control over business. This will happen at the start of the next congress with or without Obama.

Phil November 6, 2008 at 6:00 pm

I cannot believe the outrageous claim that government has the right to inflate money to decrease the value of price of assets. The American people have simply been fed the idea that inflation is inherent in economics and should be accepted. I have personally never experienced a time when prices were stable, and my money didnt lose its value from one day to another. The government, not content with taking more from its citizens than that of medieval serf, willfully devalues the wealth that remains. It is criminal. And then I see Bernanke and Paulson smile with satisfaction at the work that they have done lately. Grrrrr….

Mark Humphrey November 10, 2008 at 8:38 pm

Mainstream economists and investment types are utterly lost in the fog. The most basic litany of their neo-Keynesian faith is simple and primitive: printing money leads to the production of more wealth.

This idea serves as a prescription for whatever ails us, from stagnant “economic growth” to terrorist attacks to widespread computer problems to falling stock market and real estate prices.

In reality, however, monetary inflation produces wealth destruction rather than economic progress. For, as Frank Shostak has explained repeatedly, and as George Reisman explains very clearly in his magnum ophus “Capitalism”, creating fiat money out of thin air, and then exchanging that new money for a valuable good, is literally an act of consumption. For the recipient of the new money receives nothing of real value, “backed” by the production of additional goods; he merely acquires paper claims on wealth previously produced–claims that now buy proportionately fewer existing goods. In short, the recipient of the goods gets something for which he exchanges nothing–an act of wealth consumption.

As Keynesian alchemists drive interest rates into the dirt with their avalanche of new money, they will accelerate the consumption of our dwindling capital base. For as George Reisman explains in
“Capitalism”, the return on savings is a major well- spring of subsequent saving and capital formation.

Keynesians believe, with the unreasoning stupidity of groupies, that consumption is the only scarce “value” in economic life, which they continually seek to get more of. (This is another of George Reisman’s many original and brilliant insights.) They have succeeded
brilliantly at this project with inflation; booms and busts that promote massive consumption and waste; runaway government spending that is 100% consumed or destroyed; mind boggling regulations that throttle production; and environmental policies that outlaw human activity.

Sadly, we can all look forward to harvesting the bitter fruit of this mass intellectual delusion, tomorrow and for years to come.

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