One of the tenants of Austrian Economic Theory is non-intervention in the marketplace. However, this concept is lost on economists who think that they know better than the marketplace when it comes to what the marketplace wants. The mortgage market is one such market where the interventionists delight in manipulation.
Now, the President himself has declared that there will be further intervention in the marketplace via the Federal Housing Administration. The president’s goal is to alleviate the pains caused by past intervention with still more intervention.
When Alan Greenspan took fed funds rates to 1%, the housing market took off as mortgage companies lent to anyone who could fog a mirror. The result was a housing mania, which has turned into a nightmare. Fedgov to the rescue.
In a clearly political move, last Friday President Bush announced a package intended to help homeowners refinance unserviceable mortgages through the Federal Housing Administration. The program, however, misses the target by a wide margin.
When Bush announced the program, it stipulated that borrowers eligible for relief could not be behind on their payments. Such a stipulation, of course, means that borrowers not needing help are eligible, but those behind on their payments will not be helped. How does this help the mortgage market, unless Bush’s advisors see it getting worse and those not now behind on payments maybe getting behind as things worsen? As the program is implemented, rules probably will be changed to bail out borrowers who have missed payments.
Meanwhile, Ben Bernanke, Fed Head, has declared his willingness “to grant further relief to U.S. financial markets.” I think that choice of words illustrates the awe that people hold for the Federal Reserve System. It will “grant further relief.” What it means is that the Fed is aware of the problem Greenspan created and is willing to print more money for temporary relief. (It is foregone conclusion that the Fed will lower its fed funds rate at its September meeting.)
More Fed intervention (the creation of more dollars and the lowering of interest rates) can only result in more price inflation. Monetary inflation is the cause; price inflation is the result.
The writer of the article linked above typically sees fedgov’s plans as beneficial. Few writers understand Austrian Economic Theory. Still others, who may have superficial knowledge of it, ignore it, probably because of having spent many hours in college being indoctrinated in the various economic theories that advocate government intervention. (I have a friend who actually believes that commerce could not exist without government rules!)
As this is written, the dollar is trading below 80 on FOREX markets. A drop through 79 could send the dollar spiraling, shot down by the too much government intervention in the US financial markets. Maybe a time to buy gold coins?
