Abandoned Capital Projects
From the NPR web site:
- A vacant home in a decent neighborhood used to be a rarity. But in cities around the country, homeowners and investors — unable to afford the homes they bought — are abandoning their properties, marring the neighborhoods they leave behind.
The Austrian theory of the business cycle explains how the issuance of credit beyond voluntary savings leads to an unsustainable mix of investment decisions among the various types of capital goods. This process can proceed up to a point until the credit expansion stops and the interest rate returns to a level consistent with consumer preferences, or, if the expansion continues, then costs rise somewhere along the line enough to bring some of the mistaken investment projects into bankruptcy. As part of the restructuring process to bring prices back into line with consumer preferences, partially complete investment projects will be abandoned.
This is what we are seeing in the housing sector. If a home can be thought of as a capital good, which releases a stream of 'housing services' over time, the purchase of a home on credit is a capital investment project. Many people undertook home investments with an incorrect estimate of their future cost of financing, or of the resulting end demand for homes.
Comments (8)
David C
As I was reading this, I remembered a story I read about the great depression where farmers were dumping their milk out into the countryside because they lost more selling it in the market than they did by just dumping it. Meanwhile, people in the cities were starving.
Well, it looks like the 2007 version of that will be: millions of homes sitting empty while millions become homeless.
Published: November 11, 2007 3:56 PM
Mark Humphrey
David, just a friendly comment on your post, above. Farmers in the Hoover-Roosevelt Depression had to dump milk for a single reason: FDR and his Congressional pals imposed price floors on a wide array of products, including farm commodities. These price controls mandated that commodities and other goods had to be sold at prices above a legally imposed minimum, which was a price above the market price. The artifically high legal price choked off demand and increased supply, thereby creating an unsold surplus of the regulated good.
This sad mess was worsened by FDR-imposed marketing quotas, designed to create artificial scarcity and force prices higher. The milk dumping, of which you wrote, was of milk produced in excess of quotas allotted to farmers by the state. Other farmers slaughtered and buried thousands of pigs, chickens, eggs, and other valuable commodities because they were forced to do so by FDR's surrealistic economic controls.
Published: November 11, 2007 5:15 PM
J K Leu
We farm in Canada.Prices here for cattle and hogs are about the same as in the seveties. We are a big sink for inflation. It stops dead with us. Our costs rise daily, we cannot pass them on. Cheap Protein for the Masses, regardless of the cost. It is a way to hide from the poeple how worthless their money has become. It will end someday along with the manipulation in other markets. The poeple will suffer greatly, the hyper-inflation has begun. There are already millions of homes empty, the owners can not be in more than one of there homes, at a time. And the homeless have none. Hold on to your wallet!
Published: November 11, 2007 8:56 PM
J K Leu
We farm in Canada.Prices here for cattle and hogs are about the same as in the seveties. We are a big sink for inflation. It stops dead with us. Our costs rise daily, we cannot pass them on. Cheap Protein for the Masses, regardless of the cost. It is a way to hide from the poeple how worthless their money has become. It will end someday along with the manipulation in other markets. The poeple will suffer greatly, the hyper-inflation has begun. There are already millions of homes empty, the owners can not be in more than one of there homes, at a time. And the homeless have none. Hold on to your wallet!
Published: November 11, 2007 8:56 PM
DickF
Do not confuse the malinvestment Robert Blumen is discussing with government policies of price controls or market manipulations. He is talking about the illusion that causes businesses to expand beyond the real capacity of the economy because of monetary expansion.
In this case credit expansion (lower credit) induced an increase in home purchases and in valuations. Businessmen saw the expansion as a signal to enter the expanding market. Their projections seemed sound, but when the FED turned down the flow of funds the illusion ended with homes left unfinished and unsold.
Published: November 12, 2007 7:33 AM
George Gaskell
Do not confuse the malinvestment Robert Blumen is discussing with government policies of price controls or market manipulations.
Credit expansion is a form of price control and market manipulation. They are more alike than not. Artificially low prices on commodities cause an increase of the consumption of that commodity.
Published: November 12, 2007 7:56 AM
DickF
George,
If you mean by credit expansion an increase in the money supply then I disagree that this is price control. It is not targeted at one product but at the economy as a whole. The result is a degredation of the value of the monetary unit not an artificial demand curve for a product. They have different impacts on the economy.
Published: November 12, 2007 4:19 PM
鲜花
many thanks
Published: November 18, 2007 11:27 PM