Pittsburgh Tribune-Review: “Systemic trouble”

by Don Boudreaux on May 13, 2020

in Archived writings, Country Problems, History, Housing, Intervention, Monetary Policy, Seen and Unseen, The Crisis

In my June 3rd, 2009, column for the Pittsburgh Tribune-Review I – influenced in part by Thomas Sowell – blamed much of the Great Recession that started in 2008 on imprudent government interventions into the economy. You can read  You can read my column beneath the fold.

Systemic trouble

Every day, some businesses fail. Every day, some households discover they are too deeply in debt. Every day, some workers make mistakes. Every day, some other workers lose their jobs. Every day, some lines of credit dry up. Every day, some people are cheated by frauds and shysters.

While not especially happy, none of these realities signals that the larger economy is faltering. Nor do any of these realities cause it to falter. In healthy, growing economies, business failures are offset by business successes; job losses in one industry are offset by job gains in other industries; restrictions of credit to some lines of activity are offset by grants of credit to other lines.

A virtue of decentralization is that one person’s poor judgment or bad luck is counterbalanced by another person’s excellent judgment or good luck. A lousy business decision made by the executives at, say, Yahoo does not harm Google, for the folks who direct Yahoo don’t direct Google. In fact, Yahoo’s bad decision creates a profit opportunity for Google, and Google has strong incentives to grasp this opportunity. The result of this decentralized, private system of decision-making is that the larger economy continues along swimmingly.

So when the economy as a whole falters — when problems are widespread, as our problems today seem to be — the cause is likely some “thing,” some institution, that operates throughout the economy and that is controlled centrally.

Government itself, of course, is one such institution. Uncle Sam’s statutes and regulations are promulgated from Washington, D.C., to all corners of the country. Wise or foolish as any of these commands might be, every American must obey each of them. Persons who believe that a particular government dictate is harmful or unworkable cannot simply ignore it or choose some alternative means of pursuing the statute’s goal.

Government intervention overrides the piecemeal experimentation and the ability of each of us to copy actions that work (and to avoid those that fail) that is at the heart of markets. In place of decentralized market experimentation, government subjects us all to the untested theories and often wild dreams of human beings who excel at winning political power. Any government dictate, therefore, has the potential to unleash systemwide harm.

In his new book on the housing-market crash, “The Housing Boom and Bust,” Thomas Sowell lays much of the blame for today’s troubles on precisely this sort of systemwide intervention. Uncle Sam’s insistence on artificially driving down the price of home mortgages, especially to increase the rate of home ownership among lower-income Americans, forced many mortgage lenders to make loans that, we know now, should never have been made.

Loose monetary policy facilitated this misguided policy. From 2001 to 2006, the Federal Reserve — which has monopoly control over the supply of dollars — opened the money spigot wide. With the economy flooded by new dollars, everyone was liquid. Spending power seemed abundant.

All this new money had to go somewhere. And where it went was real estate. Demand for housing was thus artificially stimulated.

For a while, the unsustainability of this excess demand for housing went largely unnoticed. Rising housing prices attracted even more of the new money, which then drove up prices even further.

New dollars, however, are not wealth. They’re pieces of paper featuring monochrome pictures of dead American statesmen. (Or even less substantial, they’re digital entries in bank accounts.) While an adequate supply of money is essential for making commercial exchange convenient, creating more money doesn’t increase real wealth. Newly created money doesn’t add to the total stock of goods and services available to consumers.

What newly created money does do is make people think they’re richer than they really are. Mistakenly thinking themselves to be richer because they have more dollars in their bank accounts, people spend more. But with no increase in the amount of stuff to buy, this higher spending results only in higher prices. In short, inflation.

Although the definitive history of today’s economic troubles won’t be written until they are over, it’s likely that the Fed’s loose monetary policy combined with Uncle Sam’s intensified insistence on raising the rate of home ownership to cause an inflation of real estate prices. And like all inflations, this one diverted economic activities from genuinely productive areas into areas that only gave the appearance of being productive. Resources were misdirected.

Given that housing prices bubbled and then burst, the proper course would have been to let the market direct the misdirected resources into economically more sustainable uses. Unfortunately, Washington panicked — a panic that seems bound to give Washington more, not less, influence over the economy.


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