Topic: Economics
Government help, and how to avoid it Two big problems are dragging the economy into a recession. The government is doing a lot to make them worse.by Billy Joe
(libertarian)
Monday, September 8, 2008
As of this writing, the United States is heading into a recession, but it is important to remember that every problem is also an opportunity. That is why I think this is a great learning moment for how government responds to "market failures".
The big economic issues today are the plummeting home prices and skyrocketing oil prices.
The response has so far been to implement windfall profits taxes on oil companies and bailouts of the mortgage companies and investment banks exposed to bad mortgage debt. Let's look at these responses one at a time.
Windfall profits on oil companies will have the effect of limiting future oil exploration because higher taxes artificially limit the potential returns on that investment without reducing the risk at all. With less exploration, less oil will be found, extracted and refined into fuel. Future oil prices will surely be higher as a result.
Okay, so what about plunging home values? The Federal Reserve and the U.S. Treasury Department have or will bail out investors in mortgage debt to the tune of hundreds of billions of dollars. This is what economists call a "moral hazard" which means it is a policy that encourages future behavior by the recipients of the financial rescue to engage (or continue to engage in) the excessively risky behavior that caused the problem in the first place.
The housing glut is actually two related problems. The first is that there are too many houses to support the existing valuations, the other is the "credit crunch" or the inability of people to obtain loans for things they need like houses. The rescue of Fannie Mae, Freddie Mac and the banks drowning in bad mortgage debt will have the effect of increasing the availability of credit but, due to the law of supply and demand, also the unfortunate side-effect of raising the prices of the houses and other stuff purchased with that credit. New home-owners will go further into debt to buy the same stuff at higher prices (and pay more property tax while they're at it) while the banks can go back to lending irresponsibly. So, overall, the winners with this plan are the banks who get to escape the consequences of their own bad decisions and the government that gets to collect more property taxes. The home-buyers get nothing because they get access to loans at the same time they have to pay higher prices for the stuff the loans buy. The net losers are the tax-payers (and future tax-payers) who pay for the bail-out.
The Federal Reserve could help with the high cost of gas and other commodities by raising the interest rates it charges its member banks and thereby tightening the money supply, but that would make the housing/credit problem worse. It could fix the housing/credit problem by lowering rates and loosening the money supply, but that would cause inflation and make the oil problem worse. The Fed's best course of action is to do nothing, which raises the obvious question of why we should even have a Fed in the first place.
This concludes this learning moment. The government, in its infinite wisdom, is showing us that there are no market problems that it cannot make drastically worse. Closer examination will even show that there are few market failures that the government didn't cause in the first place.
Did you like this article? If you did, Thumb It! 3 thumbs so far
The views expressed in this
article are those of Billy Joe only and do not represent
the views of Nolan Chart, LLC or its affiliates. Billy Joe is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Want to comment on this
article? Leave your comment here. Your email address is
required to track your comment. However, we will neither
publish your email address nor distribute it to other
organizations or persons. The only reason we might use
it would be if we needed to contact you regarding your
comment. All comments are subject to our
terms of use policy.
