I've noticed that while the national media has given at least a small nod to Austrian free-market economics, many recent articles in my local newspaper say that the current situation is a failure of free-market capitalism. I've decided to write a short opinion piece and see if they will run it. I've been reading articles on Austrian economic theory for a while now, but I still don't feel like an expert at all. So, if some of you well-versed economists would give this article a once-over and give me a little feedback, I'd appreciate it.
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After reading many recent articles on the current financial crisis, I have come to the conclusion that the vast majority of our politicians in Washington, along with most of the media, do not understand the cause of the problem. Numerous politicians and journalists have said that the housing situation is an unfortunate result of free-market capitalism and that more regulation and government intervention are required to stave off the fast-approaching recession. On Tuesday, the Anniston Star ran an article that contained the following statement:
"One likely casualty of the near-collapse on Wall St. is the unfettered, Wild West free-market atmosphere that allowed such a system to develop."
Where is this unfettered free-market? The "free" part of the market died a long time ago. The U.S. economy is heavily regulated and constantly interfered with by the federal government. Every level of financial transactions in banks and other institutions have to comply with regulators on both the state and federal levels. In addition to the regulation, the Federal Reserve (an unelected board) has the authority to set interest rates and print money arbitrarily.
Austrian free-market economics says that the entire boom-and-bust business cycle that the economy experiences is due to the involvement of the federal government. This housing bubble was caused by the Fed setting an interest rate that was lower than a free market would bear, the Fed's inflation of the monetary supply, and legislation passed by congress to prop up the mortgage and housing market. If, for example, builders build too many houses, then a free market would dictate that they would need to drop prices for the houses to sell. Instead, they are subsidized by the government in order to keep prices high, which interferes with the market and causes a bubble when combined with the low interest rate set by the Fed. It is far better to let the correction of prices occur rather than to attempt to put off the correction and make the recession far worse in the future by propping up industries now. The longer the bubble is allowed to grow, the bigger the bust will be when it finally pops.
The bailout legislation proposed by the Treasury and the Bush administration is created by the same group of people who caused the problem and is designed to keep the bubble going long enough to fall on someone else's administration while passing the bill on to the taxpayers and their children. Instead of listening to those that caused the problem and debating their solutions, why does congress not look to those who predicted the problem and have been arguing against our current monetary policies for years? Congressman Ron Paul (R-Texas), among others who are well-versed in Austrian free-market economic theory, have been warning of this housing bubble since 2003, and of the consequences of our loose monetary policy for much longer. Since they could predict the problem, why not listen to their solutions to keep it from happening in the future?
Instead, congress is being rushed into making a decision on a plan devised by men who do not realize that they were instrumental in creating this crisis in the first place. This bailout is designed to protect the big players on Wall St. and the large financial institutions from the bad decisions that they have made by making you, the taxpayer, buy their junk assets without you even having a say in the matter. It is socialism and welfare for the rich and flies in the face of capitalism and liberty.
You can say NO! to the bailout by e-mailing, writing, or calling your congressmen. E-mailing and writing all three of your representatives at once can be accomplished by visiting www.rallycongress.com/stopthehousingbailout online.
plaguester:This housing bubble was caused by the Fed setting an interest rate that was lower than a free market would bear, the Fed's inflation of the monetary supply, and legislation passed by congress to prop up the mortgage and housing market. If, for example, builders build too many houses, then a free market would dictate that they would need to drop prices for the houses to sell. Instead, they are subsidized by the government in order to keep prices high, which interferes with the market and causes a bubble when combined with the low interest rate set by the Fed.
A reference to actual reserve requirement numbers and naming a few builder subsidizing laws would be nice here.
plaguester:This bailout is designed to protect the big players on Wall St. and the large financial institutions from the bad decisions that they have made by making you, the taxpayer, buy their junk assets without you even having a say in the matter. It is socialism and welfare for the rich and flies in the face of capitalism and liberty.
I'd add a word about lucrative bonuses Wall St. CEOs get inspite of leading their firms to bankruptcy.