Letting housing prices fall to clear the market–what a concept!

06 Sep

The New York Times is reporting that the federal government’s efforts to prop up the sagging housing market have not worked (what a surprise!); the housing market is still mired in a depression.  Instead of calling on the federal government to “stimulate” the housing market to prop up demand—and prices—analysts are now calling for the unthinkable just a few months ago, letting housing prices find their equilibrium levels in a free market.

In short, letting the housing market find the level where buyers and sellers can function without government “aid,” may become the new mantra in the nation’s capital.

Free market advocates argued unsuccessfully in the past to let the housing market find its own level.  When the housing bubble burst, prices had to fall to bring demand and supply in balance.  But crony capitalism and interventionist ideology that has been embraced by policy makers for decades swung into action—the federal government must act to bolster the housing market.

The distortions of the housing bubble are still with us because the market was not allowed to “clear.”  If the housing market was not propped up, the “carnage” of a housing market collapse would have been widespread, but it would have been over quickly.  Prices would have fallen substantially, homeowners would have defaulted or had their mortgages modified, banks would have taken losses, and buyers would have come into the marketplace to snap up housing bargains.

This scenario was not allowed to unfold because of the big government ideology that has infected the political class as well as the business community.  We are paying the price for not letting markets work.  The economy is mired in a great recession, unemployment is officially at 9.6%, the unofficial unemployment rate is over 20%, the federal budget is still in the red to the tune of more than one trillion dollars per year, and the Federal Reserve appears ready to create hundreds of billions of new dollars to “stimulate” the economy.

Meanwhile, over at the New York Times, ’economist” Paul Krugman is calling for more federal government stimulus to lower the unemployment rate, which goes to show you that “voodoo” economics is a prerequisite to win a Noble Prize in economics.

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