How Money Caused the Housing Bubble and Other Troubles | Mark Thornton

is the title of a pamphlet that was written by Murray Rothbard and Murray Rothbard was one of the very most important Austrian economists probably one of the most important American Austrian economist and he penned this little history of what the US government has done to our money over time very slowly as mr. McCaffrey pointed out over a period of a couple of hundred years we went from a monetary system which was based on gold coins and silver coins and copper coins that were commodities of real tangible very value to the point in time where nowadays our money is paper that represents nothing of tangible value and it's actually a little worse than that because most of our money particularly for the adults in the audience and on the web most of your money isn't even paper it's just electronic entries in the bank and one of the things that's a little unsettling is that you put your money into the bank and you sort of maintain this impression that well my money is in that bank if there's some kind of very protective room with shelves and my name is right there my stack of money sits there waiting for me to come and get it no it's not there banks nowadays are not storehouses of money banks hold money like Walmart holds money just a little bit of money in the drawers to make change for that vast amount of inventory that sits in Walmart ready for us to buy so we've had this unbelievable transformation over 200 years and it's synthesized in that pamphlet by Rothbard what is government done to our money you get an electronic copy from the webpage and I think that pamphlet itself is available either here or online for a couple couple bucks okay the topic of my lecture this morning is how money caused the housing bubble and other troubles okay I'd like to begin by giving you a homework assignment I'd like you to google my name which is mark Thornton th o r NT o N and housing bubble and look at the list of things that come up and what that's going to show you is that myself and the Austrian economist of the Austrian school knew that there was a housing bubble in existence early on well before anybody else noticed and so I have my articles where I talk about the housing bubble and I also have articles where I talk about other Austrian economists who were writing about the housing bubble before I was and in the early days 2003 2004 when the housing bubble was in full swing and we would say well it's a housing bubble it's just not real and people would berate us they would say that's stupid you you never lose money in real estate housing prices only go up how could there possibly be a housing bubble that might come undone so we were kind of quiet about it in 2003 in 2004 because you never you can never be absolutely sure of these things as I'll explain when I tell you about the Austrian theory of the business cycle so I wrote about it the housing bubble in February of 2004 and then the first half of that year I had some experiences that made me think well this housing bubble is not only real but it's much bigger problem it's going to be a much bigger problem than the typical business cycle of ups and downs in the economy in May of 2004 I got a call from my brother out in California he had gotten a new job he was a mortgage lender and I thought to myself you know that's the last thing in the world I think my brother could possibly do is to be put in charge of giving money to other people you know I just imagined someone appointing my brother to be the chairman of the Federal Reserve or something like that and he said mark you know this is really easy I never imagined it was going to be this easy people called me up who already have a mortgage and I refinance their mortgage so that their interest rate is lower their payments are lower and I can give them 30 40 50 thousand dollars cash refinancing their house he said mark it's almost too good to be true and that set off a light and with me that anytime somebody says it's almost almost too good to be true it usually is so that was on Saturday I go into work excuse me on Sunday I went for this walk around my neighborhood and I noticed that a colleague of mine who had a rental house that they someone was putting up a for sale sign in front of that house nice neighborhood small house and so Monday morning I go into the office and I said hey Dave I'd noticed you put your rental house up for sale he said nope it's already been sold he said two people called my real-estate agents on Sunday afternoon in order to buy the place and they paid 19 the ultimate buyer paid 19 thousand dollars more than I listed it for so that's the kind of thing that was going on and also what was going on of course was behind the scenes the Federal Reserve had started manipulating interest rates in the economy and it brought interest rates down from a normal range of 5% lending money for them to lend money to banks down to 1% okay so that's a key feature in the Austrian theory the business cycle is that the central bank or the Federal Reserve is going to manipulate interest rates in such a way as to reduce the rate charges banks from a normal or market level based on supply and demand and so forth down to a very low artificially low level when the interest rates are low for banks then the rate it charges it to customers is also reduced so the price of borrowing money is also reduced in the economy so when the price of anything is reduced what happens of course is that more of it will be transacted as a result so if we brought the price of iPod iPads down from $500 down to $100 this audience might might currently have maybe a dozen iPads might everybody might want to go out and buy one for $100 right why not if you've got the money the price is low let's go out and do it so what happened as a result of these lower interest rates in the Fed mortgage rate interest interest rates also came down to historically low levels this caused in turned more people to want to build homes and to want to buy homes and as the process of buying started to take place of course the supply side of the market also changed and you had more people going into construction industry more people going into the housing input supply businesses going into business and expanding their operations so housing prices are rising housing starts are rising the size and number of home construction companies is also beginning to rise they're taking resources from other areas of the economy such as manufacturing and so what the fed ends up doing what seems to be nice they seem to be giving us all gift reducing the price so people can afford a mortgage they can afford to buy their own house the president of the United States George Bush was promoting all of this thinking that the dream of home ownership would not only put people in a place where they could live but it could fulfill the American dream that they become property owners and they become better citizens as a result stock prices go up in the economy as a result as well unemployment comes down so it seems as if the Fed is making everybody's dream come true the economy starts booming and the money flows into housing so a bubble develops in our economy in favor of housing and essentially what they're doing is they're distorting the whole structure of the economy the structure of production and consumption has changed as a result it's not just a little problem it's a systemic problem in the economy but it's a problem that cannot continue eventually as this boom continues on as the bubble develops there's inevitable changes in the economy that result here in Auburn for example in 2005 2006 2007 as the housing bubble is maturing or getting older long in the tooth so to speak what started happening around us was that the whole structure of our little community was changing apartment buildings were being converted into condos other buildings were being torn down and turned into large condominium complexes they were called luxury gameday condominiums in other words the idea here was that people were going to come to Auburn and buy an expensive condominium so they would have a place to stay when they came to Auburn for the football games and I thought to myself well isn't that odd that you would pay like a quarter of a million dollars in order to have a place to stay for six weekends or six days out of the year that seems a little odd to me at the time but apparently it didn't seem odd to the 12 developers who went into this business or to all their clients who bought these condominiums and so several of those developments were in this local area and I would question these people you know as to the rationality of doing these kind of things so you know wouldn't it be cheaper just to I don't know rent a Winnebago or get a hotel or something like that you know it's awful expensive and you got this mortgage on this property and you've got to keep it up and you've got dues you have to pay so you're paying you know like one hundred and sixty nine dollars maintenance fee on this condo every month of the year that would seem to pay for a hotel room for the games at least and you know the answer I got back was well if we get tired of it we can always sell it for more later on well it turns out they couldn't sell it more later on and anybody who bought one is either stuck with it and the mortgage or they lost a lot of money on it and several developers went bankrupt and thanks to all that folly there are several hundred Auburn students who are now are very thankful to be renting luxury GameDay condominiums you know with covered parking swimming pools workout rooms balconies but that's the kind of systemic restructuring that the Fed can engineer from Washington DC a thousand miles away down to little old Auburn Alabama now left to its own devices the market economy restructures itself on a regular ongoing basis an example of a natural restructuring of the economy when I was a boy I lived in a small town and we were surrounded by farms and about half of those farms were dairy farms where there were dairy cattle and the dairy farmers would let the cattle out and they would eat grass and then they would come in and the cows would be milked into a tank and then a little truck would come and take the milk out of the tank into the truck the truck would drive into town to one of three dairy businesses and the dairies would put the milk into cartons or make it into butter chocolate milk was my favorite and then they would cool it down and then the next morning some guy would go through the neighborhoods before dawn and put the milk magically out by our back door so that was a very direct process from the field you saw the country into the business and then back to the back door nowadays it's a much bigger structure of production there are much bigger dairy farm and with much more equipment to milk the cattle with the cows and the milk is put onto much bigger trucks and shipped far away and processed by large processors who then ship it not to your backdoor but to the supermarket and then you go to the supermarket and get it so that's a natural kind of evolutionary change which makes milk cheaper and more available to everybody not engineered by the Fed but the Fed can manufacture dramatic radical and wrongheaded changes in the economy and one of those things was the housing bubble now to the inevitability why can't this just go on why can't we have our luxury GameDay condominiums well the boon creates the changing conditions which inevitably have to show that the boom was the wrong thing first of all if everybody is trying to do a particular thing like build houses or if everybody is trying to make computer chips then the cost of producing those things is going to go up if everybody is trying to get the raw materials the inputs the specialized labor the raw materials and so forth to make a particular thing like houses then the costs are going to go up so in the housing bubble the cost of granite countertops went up because granite is hard to get and if everybody's trying to install granite countertops in the kitchens of these new houses the prices the cost of producing those kind of houses Rises and also the cost of things in the economy are rising as the boom proceeds no matter what kind it is then basic raw materials are going to become more expensive so every time we get into a boom in the economy or a bubble one of the things we inevitably see is oil prices rising oil is kind of a master input we use it in everything driving energy for the house of mcgraw culture manufacturing it's just used for everything so whenever there's a boom in the economy oil prices rise food prices rise so everybody's budget takes a hit we're paying more for gas we're paying more for electricity we're paying more for food so all of the customers all of us have less money left over to buy whatever the bubble is about and also in a bubble as in the case with the housing more and more people get into that industry the number of contractors in Auburn for example quadrupled during the housing bubble so there's many many more competitors who can make that same product so what happens in a bubble eventually is that the cost of production rise that the number of customers out there Falls and the number of competitors rise so this is the trifecta the worst of all cases if you're a company you're an entrepreneur in the area of the bubble economy your costs are rising your customers are falling and your competitors are rising and that's essentially what happens and what did happen in the housing bubble in almost all cycles of boom and bust in the economy now the market started correcting for all that what we saw as the housing bubble came undone was that people who granted mortgages a lot of them went out of business we saw financial companies restructuring merging with other companies trying to compensate the lack of business trying to compensate for the more intense competition we saw unemployment go up we saw all sorts of adjustments in the economy which the market would typically make in order to correct for the problems caused by the Federal Reserve's bubbles they the source of the problem mortgage financing started to dry up the oversupply conditions in construction started to decline housing starts start started to fall unemployment in construction started to decline housing prices started to fall all of the normal and natural reactions to a bubble and trying to correct for that started to take place in the market economy and if we had left it alone we wouldn't be talking about this as a matter of fact we wouldn't have the economic crisis so as a matter of fact you wouldn't have had to get up early this morning and drive to Auburn Alabama because no one will be interested in this stuff but the fact of the matter is is you high school students have lived your entire adult lives with the specter of an economic crisis looming looming over us and it's not just here and now in the US but it's Europe Europe's currency an economy is in a recession its currency is in doubt Japan once-mighty Japanese business empire is teetering its economy is slipping its production levels are declining China which is supposed to be the great giant economic engine of the 21st century also has massive economic problems and problems and financial imbalances the same is true for India to a lesser degree so what happened is that instead of allowing the marketplace to unwind the problems with the housing bubble the Federal Reserve went in and tried to maintain things as they were to keep housing prices up to keep wage rates up to keep the government spending money however it wanted to so the government could spend 1.2 trillion dollar deficits every year to try to reflate the economy keep air going in so it wouldn't collapse and so we have these problems today thank you very much

Channel: misesmedia

Views: 5,373

Rating: 4.9745221 out of 5

Keywords: Money, Federal Reserve, Fed, Housing Bubble, Bubble, Boom, Bust, Economics, Austrian Economics, Austrian, Mises, Ludwig von Mises, Mises Institute, Liberty, Freedom, Property, Peace

Id: QpfpZPekNuQ

Length: 23min 4sec (1384 seconds)

Published: Fri Nov 16 2012