Comments (17)

• Inquisitor

  Excellent. Thanks.

  Published: December 31, 2008 12:05 PM

• Matt R.

  This is a great summary of the current economic malaise. Well done!

  Published: December 31, 2008 12:13 PM

• greg

  You hang too much of the economic problems on housing. The problem in housing was the over speculation in four markets - CA, FL, NV and AZ. They account for the major upswing in prices and on the flip side, the major downswing. If it was truly a Fed driven problem, we should have seen general rise and fall in prices as Fed policy is nationwide.

  Overspeculation in other markets such as oil and agricultural products tied to ethanol forced consumers to change their spending patterns. Overspeculation in investments led people to become over leveraged and increased demand for products like highly rated mortgage backed securities.

  The problem is real estate became a commodity that investors could play on the futures markets through many index traded funds. Anyone buying into real estate during this time was playing into these markets. And again, if you are playing in futures, you are playing with fire where buying and holding will set you up for a loss. Timing is everything where 10% actually break even or win.

  Published: December 31, 2008 12:47 PM

• Bennet Cecil

  The government pushed mortgage companies to approve loans to unqualified persons, but the companies went along to improve their profits. As a taxpayer, I object to the government forcing me to assume these bad debts. The buyers of these bad debts should take the losses not the American taxpayer. The American voter still does not get it. They keep electing big government politicians who either tax and spend or borrow and spend.

  Voters will understand it better when the the national debt hits $20 trillion, taxes are doubled and their dollars buy nothing. When unemployment is 15% and interest rate are 15% the ideas of smaller government, lower taxes and private property rights will look more attractive.

  Published: December 31, 2008 1:01 PM

• Inquisitor

  And when does "overspeculation" become a problem? When one has an inverted pyramid of debt. So yes, the Fed is to blame. There is no extricating it this time round.

  Published: December 31, 2008 4:38 PM

• Grant

  Excellent. I'm glad to see an article on Mises.org that does not put all of the direct blame on government action. While the crisis certainly wouldn't have occurred without certain Fed and Federal Government actions, it also would not have occurred without many errors made by businessmen.

  I would love to see an analysis of why so many errors were made, and how they relate to Fed policy. Its my believe that low interest rates make capital available to people who would have otherwise not had access to it, effectively allowing less experienced people (e.g., your barber-turned-house-flipper, or a decade earlier a barber-turned-tech-investor) to allocate the economy's capital. Couple this with new innovations (first tech, now financial) or changing circumstances (e.g., oil) that confuse even prudent investors, and you get huge numbers of malinvestments. Markets only work when they can produce accurate price signals, and legions of 'malinvestors' (who, absent the Fed, wouldn't have had as much capital to play with) can mistake a bubble price for real value.

  I would not be surprised if these mistakes were more costly than the distorted time-structure of production caused by interest rate manipulation (or if not more costly, certainly more noticeable, as foolish investors tend to invest in specific asset bubbles).

  greg, I don't believe "over speculation" is a helpful descriptor. Greater speculation by knowledgeable investors would not likely have been a problem. What causes problems is when the wrong people speculate. Markets (especially futures markets) aggregate knowledge, but sometimes they aggregate knowledge from the wrong people (i.e., people with incorrect opinions). Then they don't produce accurate prices. The question we should ask is, how were all these fools able to influence futures markets so much?

  Published: December 31, 2008 6:03 PM

• Stephen Grossman

  Long-range effects are a concern for those with a rational morality. Socialism, however, is the absurd attempt to create prosperity with the politics and economics of altruism. Since the long-range effect is poverty, socialists have abandoned ideology for short-range Pragmatism. See Ayn Rand's _Capitalism_ for more.

  Published: December 31, 2008 6:07 PM

• Abhilash Nambiar

  Check out the cartoon I found on the Subprime crisis. It covers a lot of what is in this article, except it makes you laugh.

  http://onegoodmove.org/1gm/1gmarchive/2007/11/subprime_mortga.html

  Check the comment section as well. No one seems to have heard of Austrian economics.

  Published: December 31, 2008 6:57 PM

• Michael Orlowski

  The Federal Reserve and it's Banking Cartel are financed by the fraudulent scheme of fractional reserve banking that globe doesn't notice. Sure, let's blame excessive speculation and capitalism, the fools of today. I'm not even an adult and I understand this.

  Published: December 31, 2008 8:28 PM

• Michael Orlowski

  The Federal Reserve and it's Banking Cartel are financed by the fraudulent scheme of fractional reserve banking that globe doesn't notice. Sure, let's blame excessive speculation and capitalism, the fools of today. I'm not even an adult and I understand this.
  Oh, foolish progressives!

  Published: December 31, 2008 8:29 PM

• Robert

  Another interesting detail, which makes Bob Steward's article even more succulent, is, that he was in charge of the famous Shell pension fund when it was so well managed, that no contributions at all were required. Today's managers in the Netherlands, and of JPMorgan's blessing, invested 50 million plus into Mr. Madoff's venture, and lost well over 40% of its value in the current downturn. Seems like Shell should follow Al Gore not on how he sees the world's climate, but on how he invests his personal money....

  Published: December 31, 2008 11:11 PM

• Cynicus Economicus

  An excellent summary of the problems of the housing bubble, but this crisis is far deeper. In particular there is the problem of the massive input of labour into the world economy in such a short space of time.

  See here for a summary:

  http://cynicuseconomicus.blogspot.com/2008/12/2009-year-of-fall-of-west.html

  The article points to why it is that doubling the number of a key input into the world economy must have consequences.

  Published: January 1, 2009 7:41 AM

• James Cumbie

  Good article, but I see no need to bring race into it.
  Omit black and white, poor and rich is sufficient!

  Published: January 1, 2009 8:14 AM

• Dave Primrose

  Good article but you don't mention the role of poor enforcement, lack of oversight, criminality and outright fraud in financial markets. Also the malinvestment of public money into wealth destroying events such as the Iraq "war" and bloated military spending contributed to the rationale for "helicopter" monetary stimulus.

  Published: January 1, 2009 11:42 AM

• CliffRosson

  Greg Said -
  "If it was truly a Fed driven problem, we should have seen general rise and fall in prices as Fed policy is nationwide."

  There are other industries which have felt the effects of the Feds inflationary standpoint. Not housing alone.

  Education is but one other example aside from housing which has boomed in price in correlation with the feds inflationary standpoint.

  Schools recognize that even the poorest kids can get loans and have credit available to them, therefore they price their tuition accordingly.

  This isn't saying that schools or private education is evil.This is completely systematic based on the elementary economic principles of supply and demand. Monetary expansion manipulates the natural effects of Supply/demand by un-naturally altering or changing, usually increasing, the demand. Monetary expansion has the most immediate effect on demand as it encourages people to make investments in things they wouldn't normally had made.

  Another example would be heavy and sometimes risky business expansions due to high availability of credit. However these large business expansions in the US have not equated with a better economy. Many of them were risky ventures motivated by the access of easy/cheap credit.

  It comes back to this general principle. Printing more money does not magically create new wealth. It does however encourage risky business.

  Published: January 1, 2009 10:14 PM

• gene

  Yes, good article. you did miss the outrageous bush era budget deficits and their effect on the money supply. infaltionary to say the least and dave's point on the wealth destroying war. it was a perfect storm.

  Published: January 6, 2009 11:52 PM

• gene

  Yes, good article. you did miss the outrageous bush era budget deficits and their effect on the money supply. infaltionary to say the least and dave's point on the wealth destroying war. it was a perfect storm.

  Published: January 6, 2009 11:52 PM