July 10, 2012
It’s been said that the definition of insanity is to do the same thing over and over again but to expect a different result. On that basis, the western world’s economic policymakers are clearly certifiable.
They cut rates. It does nothing. So they cut rates again. And again.
They in debt future generations to ‘stimulate’ the economy. It does nothing. So they stimulate again. And again.
Nothing that central banksters or politicians have done since the 2008 global financial crisis has fundamentally changed economic conditions. Yet they keep applying the same remedies, drawn from the same old Keynesian playbook.
The false premise which guides their decisions is that we can all grow wealthy by borrowing and consuming, instead of by producing and saving. People have been sold this lie for more than a generation. It is embedded in social DNA.
In the current western economic system, you are rewarded for going into debt with all sorts of tax deductions. Save money, on the other hand, and you are punished through taxation and inflation.
The incentives are all wrong; it’s no wonder that people have over-borrowed and overspent given that the system is so blatantly slanted to promote such behavior.
Housing is one of the most interesting examples of bad incentives: tax policy in many countries encourages people to take out debilitating mortgages, and governments end up with a moral imperative to ensure home prices continue rising.
This strikes me as truly bizarre. You’d think people would want housing costs to stay low and affordable, not rise.
Nobody cheers when the price of healthcare goes up, even though they could just as easily profit by investing in any number of insurance companies.
I don’t click my heels when the price of food goes up in the grocery store, even though we’ve been paid handsome sums from the bountiful harvests of our farm in central Chile.
And let’s not forget how much turmoil ensues when gasoline prices get too high. Why should housing be any different?
For the vast majority of people, a house isn’t wealth. It’s an expense. And wishing for this expense to increase is both foolish and destructive.
Yet most politicians and central banksters in the west are frantically fanning the flames of broken housing markets, desperately trying to re-inflate prices.
Here in Portugal, for example, housing prices have fallen dramatically. Housing has become affordable. Cheap, even. This is a good thing.
Yet the bureaucrats keep trying to figure out ways to ‘prop up the housing market’ and distort prices, often through policy that is very unfriendly to homeowners.
In the United States, the Federal Reserve keeps ratcheting down long-term interest rates and scooping up mortgage bonds in an attempt to re-inflate home prices.
With so many Nobel Prize-winning economists backing these kinds of policies, it’s clear that the people in charge haven’t even begun to acknowledge the flaws in their intellectual framework.
And if you can’t even admit that you have a problem, then you are light years away from solving it.