STAFF NEWS & ANALYSIS
Is Obama Blowing a Bubble?
By Staff News & Analysis - April 23, 2013

Re-inflating the bubble … Obama hired back all the Clinton-era officials who caused the housing bust — so they can do it all over again … In the 1990s, convinced that the US mortgage market was racist, the Clinton administration launched a massive campaign of social engineering. Through government entities Fannie Mae and Freddie Mac, officials encouraged extending mortgages to people with little or no credit. They targeted private banks with discrimination lawsuits if they didn't lend to enough minorities or people with low incomes. Housing prices skyrocketed as people with no down payment or shaky salaries suddenly were able to buy homes. Then the bubble burst. – NY Post

Dominant Social Theme: When these people are in place a disaster will occur.

Free-Market Analysis: Here is yet one more example confusing regulation with monetary matters. People won't question the logic of these articles, but truly they are, well … flawed.

Consider: In a monopoly fiat environment, bubbles and blowups inevitably reoccur. Throughout the century-old history of central banking, we've seen these sorts of disasters. Of course, the argument is made that things were worse BEFORE central banking. But we find that hard to believe.

Normal Austrian economic theory, at least as envisioned by top free-market thinker Murray Rothbard, would project that in an unregulated banking environment booms and busts would be both moderate and regional.

There are two reasons for this. First, the monetary fuel that rockets economies forward would be absent without monopoly central banking. Second, business cycles would occur in different times in different places as there would be no coordination via regulation or monetary policy.

The combination of a lowered boom-and-bust cycle plus regional economic cycles would be immensely helpful to mobile populations that can travel in search of appropriate employment.

Unfortunately, thanks to the modern mania of globalism, economies and monetary stimulation are increasingly centralized. When the US in particular catches a cold the world sneezes.

And when the US's dollar reserve economy falters, the rest of the world shudders – and eventually, there is a downturn that consumes continents.

It doesn't take the proverbial genius to understand that centralization equals homogenization. And that is the last thing you want when it comes to economies.

This Post article excerpted above alludes to these issues in a backhanded way but as already stated, it seems more misleading than not. Regulation is a factor in business cycles, but not by any means the main one – which is inevitably monetary.

You wouldn't know that from this article – admittedly something of a squib, but important nonetheless because it repeats the common fallacious arguments that make regulation more important than central banks. Here's more:

Millions were unable to pay their subprime loans, and they took the banks down with them. The housing market — and the economy — is still recovering from the folly.

Now the Obama administration wants to do it all over again.

Blithely ignoring the lessons of the housing bubble, Obama has rehired many of the Clinton hands who inflated it in the first place, pursuing the same misguided policies that try to force people into homes they can't afford in the name of "fairness."

"The administration is launching subprime 2.0," warns former chief Fannie Mae credit officer Edward Pinto.

There are "affordable housing" mandates aimed at getting Fannie and Freddie to take on even higher-risk borrowers. Through the Federal Housing Administration, houses are being offered to some low-income subprime buyers with minimal down payment and heavy subsidies …

One banking official, ex-BB&T CEO John Allison, predicts that because of these policies, "There will be another incredibly destructive crisis in our financial system in the next 10 to 15 years."

See what we mean? … The Obama administration is setting up the next crash.

But it's not. Ben Bernanke can print US$16 trillion (maybe in a weekend) and send it around the world but we are supposed to believe that functionaries in an Obama administration are the ones that are going to be responsible for the next big financial disaster?

This is the same sort of thinking that people have adopted toward the removal of Glass-Steagall – as there is a substantive theoretical argument being made that splitting up trading and banking functions would avert myriad US financial disasters.

This gives inordinate power, however, to politicians, regulators and lawyers … power that is neither justified nor deserved.

The implied accusation is that markets don't work, that market failure must inevitably be salvaged by clever regulations and even cleverer congressman.

It's just not so.

The problems start and end with central banking. Absent central banking and contributing regulation, Leviathan would be starved and even the biggest banks would lack the oxygen to make the kind of mischief they do now.

After Thoughts

You won't learn that in the Post article.

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