Chalk up another failure for Federal Reserve Chairman Ben Bernanke.
More than three years after pumping an unprecedented amount of liquidity into the global financial system (read: print money), Bernanke’s wild experimentation in monetary policy has failed to bring the unemployment rate down as well as stop the crash course of U.S. housing prices. Graphs via The Big Picture:
The past few years have brought a variety of speculation on whether a bottom in the housing market has been reached. Even while the price of rent continues its upward trajectory, to quote a recent New York Times article, “the housing market remains a potent drag on the economy as home prices continue to slip, foreclosed homes fill some neighborhoods and millions of construction workers scramble for jobs.” Those commentators and economists who see spending as the magical elixir for prosperity have been pining for a return to the home prices of the boom years. “If only Americans could use their homes as ATMs again, then the glorious amount of spending which preceded the bust could finally resume,” sums up the prevailing wisdom. Or as Mr. Union Sympathizer himself Robert Reich writes in the Financial Times today:
Has the American recovery finally entered the sweet, virtuous cycle in which more spending generates more jobs, more jobs make consumers more confident and the confidence creates more spending?Virtuous? Since when was a clear and unmistakable bubble referred to as virtuous? In the Keynesian dreamland that is! As long as those animal spirits are in full swing, the good times can roll regardless of the unsustainability of the binge!
Yet the biggest continuing problem for most Americans is their homes. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December.
The plunge in home values has changed all this. Young couples are no longer buying homes; they are renting because they are not confident they can get, or hold, jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They cannot relocate to find employment. They cannot retire.
As many should know, following the crash of 2008 the Fed took unprecedented steps to stop a much needed market correction:
Despite Bernanke’s best efforts of juicing inflation in housing, Mr. helicopter has only succeed in waging a war on savers and those on fixed income with anorexic interest rates and rising food and energy prices. With housing prices back to pre-2003 levels, such speaks to the failure of central bank-driven monetary policy that is directed to a specific cause. Like the now-in-vogue notion that central banks should concentrate on inflation or NGDP targeting, the money printers can’t guide where their newly created currency is funneled into.
It can’t be mentioned enough how puzzled this author is when those who deny the plausibility of the Austrian business cycle theory are usually the first ones to call for suppressed interest rates to fight recessions and create and economic boom. In his infamous 1998 Slate article, Paul Krugman labels the Austrian theory, which he disparages by calling it “the hangover theory, as incoherent for its stipulations that artificially low interest rates cause malinvestment and lead to a bust after inflationary concerns lead to a ceasing of monetary expansion. If the Austrians were wrong, then curtailing low interest rates wouldn’t result in a bust as the investments made during the boom would forever be sustainable and not a product of discoordination between savers, the amount of available capital, and the exuberance displayed by spenders and investors.
While there will undoubtedly be calls for more aggressive action by the Fed or federal government to get home prices riled up again, those “more spending” advocates will inadvertently be recognizing the credibility of the Austrian theory. If the Fed is capable of boosting home prices, in turn setting off a spending binge based on the perceived wealth viability of a home, then a contraction in the money supply must have the same effect but in the opposite direction.
Meanwhile, with home prices still falling, it’s not evident if the clearing state for the housing market has been reached. The past three years of monetary prime pumping has only slowed down the inevitable. In lieu of the Fed’s unprecedented action, the housing market low could have conceivably been reached by now and prices may have even started rising. Instead, the bust has been prolonged which in turn prolongs the suffering of all.
In the immortal words of Mises:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.