Markets
Need Time, Not More Poison
by
Bob Murphy
by Bob Murphy
DIGG THIS
A recent
story from the front page of the Wall Street Journal
illustrates the bankruptcy
of mainstream macroeconomic thinking. The piece contains so
much nonsense that the only appropriate critique is to go through
the article step by step:
Shrugging
off a flurry of grim economic news, stock investors pushed the
Dow Jones Industrial Average up more than 10% as they anticipated
new medicine from the Federal Reserve.
I realize the
WSJ is in the business of selling newspapers, and that calling
injections of Fed funny money "medicine" is a catchy opening.
But if our present crisis it the result of prior injections
of artificial credit, then the medicine is in fact arsenic. What
is especially ironic is that this very article later on alludes
to the possibility that the housing
boom was fueled by Greenspan's low rates. In any event, the
most recent Fed cut was largely symbolic, since the actual fed funds
rate (as opposed to the official "target" set by the Fed)
had already been below 1 percent for some time:
Let's return
to the article:
The case
for more rate cuts strengthened Tuesday, with new reports showing
the economy deteriorating sharply. The Conference Board said its
monthly measure of consumer confidence hit 38.0 in October, the
lowest level since the New York-based business research group
began keeping records in 1967….The housing market also took
a turn for the worse. Earlier in the summer, some housing indicators
suggested home-price declines might be slowing. But the S&P/Case-Shiller
home-price index for 20 large cities was down 16.6% in August
from a year earlier, a record decline. Falling home prices can
feed a downward housing spiral, creating pressure for more foreclosures
and resulting in mortgage losses among banks.
 It
is true that spiraling home prices are the ultimate driver of the
immediate problems, but to repeat, we are in the present mess because
of an unsustainable boom in housing. Everybody agrees that investors
foolishly bought into a rising market, and that the incredible appreciation
in house prices was not based on fundamentals. How else will the
economy move on, if these admittedly overvalued properties do not
shed some of the gains during the artificial boom? Government efforts
to prop up house prices will waste billions of taxpayer dollars
and will only serve to continue denying reality.
The article
touches on this point – unintentionally – when it says:
[T]he last
time the Fed pushed rates [to 1%], it helped to plant seeds for
the current credit bust, some economists argue, by contributing
to a frenzy of borrowing by households and on Wall Street. That
doesn't appear to be a concern for Fed officials now. Credit markets
are so shaky and the economic outlook so unpromising, another
speculative frenzy now looks remote.
Read
the rest of the article
November 7, 2008
Bob
Murphy [send him mail]
runs the blog Free
Advice and is the author of The
Politically Incorrect Guide to Capitalism.
Bob
Murphy Archives
Copyright
© 2008 Ludwig von Mises Institute
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