Saturday, March 9, 2013

Housing bubble, not a result of the free market


I had a conversation the other day and I was told that it was the free market that created the housing bubble. This idea is so patently false I cannot believe anyone believes it. I don't need to know the minutia of what regulations were repealed or changed leading to what missteps by what banks to know that the root of the housing bubble was the government and the federal reserve.

I think everyone can agree that the housing bubble and subsequent crash was caused by people buying houses they really could not afford by getting loans for them, and when the housing prices dropped they went underwater and defaulted on their loans. They were led on by low interest rates and easy access to money for their houses.

In a free market the only money that can be loaned out, is money another party has saved and made available to loan. During the housing bubble savings rates were at a low, debt was at a high. This is a situation that can only occur in an artificial situation where the amount of money available for loans has no connection to the amount of savings available to be loaned out. This situation can only be created by the government. In a free market when savings rates are low interest rates are high, and when savings rates are high interest rates are low, in the years leading to housing bubble the opposite was occurring and this is just not possible in a free market. Therefor the only conclusion to be made is that the housing bubble was caused by the government and the federal reserve and not the free market. I can draw this conclusion without knowing what regulations were changed by the congress, what programs George Bush wanted, etc. 

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