We Really Need to Get These Tulip Prices Up
To really understand the absurdity of mainstream economics, one only needs to study the reaction to the current crisis.
The housing bubble, like all bubbles, finds its origin in an expansion of the monetary unit beyond market requirements. To understand that sentence requires an understanding of how markets work. Mainstream economists spend very little time investigating how markets work, instead focusing on all the ways (both real and imaginary) that they don't work (as they would like them to.)
Markets clear. And no expansion of the monetary unit can persist unchecked without intervention, be it a law that restricts market activity (your classic price control or regulatory incentive) or an institution created to purposefully keep the expansion going (central banking).
However, no intervention has ever been able to keep a bubble inflated indefinitely - the bizarre goal of Keynesian economists. They are not particularly concerned with understanding why a market would no longer demand goods and services available. Rather, they focus on trying to re-stimulate that demand. It matters little what is available. Just buy it.
In essence, the Keynesian says "I don't care if you don't like tulips anymore. Depressed tulip prices are damaging our economy and slowing our recovery. We need to get that tulip industry going again, and that starts with bringing those prices back up!"
The Coming Boom
This illogic translates to cheers from economic journalists when post-bubble industries start to recover. Little thought is given to whether this recovery makes any economic sense or as to the root of the problem. Motley Fool journalist Morgan Housel worte such a piece recently:
"The new boom will be driven by three things: A rebound in housing construction, the rise in domestic energy production, and the end of consumer debt deleveraging."
That piece landed Morgan 264 recs and counting. In the comment section, he offered a contrarian reason for optimism as well:
"Anyone who suggests anything about optimism is met with giggles and mockery. Quite telling."
What journalists like Morgan fail to realize is that the difference in opinion is not the result of interpretation of data, not a dispute of the data itself.
Housing is Recovering
Make no mistake about it, housing is on the upswing. Robert Wenzel of Economic Policy Journal has been following this trend for months. The difference between an economist like Weznel and the mainstream opinion is in the interpretation of the consequences of such a recovery.
In the same way that a recovering Tulip Industry would have provided a temporary benefit to thousands of Dutch that lost their economic position from the predictable collapse, so will a housing recovery offer many benefits to the American economy in the short run. It's also completely illogical to ignore the long term ramifications of such a recovery.
We got into this mess by cheering bubbles brought to us by manipulation of credit. Such manipulation distorts reality, causing a mismatch between consumer preferences and producer investment. The market had no need for the millions of excess homes brought to the market. There was a non-existent demand that had to be artificially created through credit expansion. The longer the expansion persisted, the worse the resulting bubble.
Imagine the silliness in propping up the Tulip Bubble and you can start to understand why I can't be as optimistic about The Coming Boom as Morgan Housel.
Yes, housing prices are on the rise, and yes, that will create a temporary feeling of economic recovery, particularly among those who will directly benefit. But to imply that this is a good thing for the overall health of the economy, to ridicule those who attempt to look under the surface in order to understand the root problems, or to cheer the institutions and force used to create this fleeting euphoria is plain ignorant.
Sadly, such economic ignorance is perpetuated, not remedied by the constant mainstream media cheerleading over any econometric indicator of recovery. Motley Fool's writers offer few exceptions.
David in Liberty