Liberty Forged

the State has no money of its own, so it has no power of its own. ` Nock

Posts Tagged ‘construction’

A roofer gives some insight regarding the Fed and recession

Posted by Jesse on February 6, 2008

Mark R. Crovelli writes:

What Caused The Boom In The First Place?

As was noted above, the idea that has been most responsible for the widespread complacency among business owners and construction workers with regard to the housing recession is that the whole housing crisis can be rectified through some action or another by the Fed. This idea is totally mistaken. The root of this mistaken idea lies in the failure of construction workers and business owners to grasp the root causes of the housing bubble in the first place. When the cause of the housing bubble is investigated, however, it becomes clear that the Fed itself was responsible for the creation of the bubble and it is now impotent to forestall a severe housing recession for long.

An example from my own construction experience is perhaps the best way to initially illustrate the Fed’s responsibility in creating the housing bubble. When I was a graduate student at San Diego State University a few years ago, I worked in a number of construction-related capacities in southern California at the peak of the housing boom. One of the most memorable jobs I undertook involved the remodeling of a horse barn for a doctor in the Temecula valley. This doctor had recently acquired a great deal of cash by means of a massive home equity loan, and he was willing to pay me and a good friend $17,000 of this newly acquired money to rebuild a part of his horse barn because he thought it a somewhat unsightly view from his swimming pool. (Interestingly, the good doctor did not, and still does not own horses). At the time, this sort of construction project was being repeated all over southern California, to the point where it would have been more profitable for me to remain a construction worker than it would have been to pursue a job with my graduate degree. Virtually all of the construction projects across southern California (and elsewhere), were financed with either gigantic home loans with ridiculously low interest rates, or, like the good doctor, with home equity loans with ridiculously low interest rates. What few people in southern California seemed to be asking either then or now, however, was where the banks got this massive amount of money to loan out in the first place? How, in other words, did the banks in southern California manage to miraculously come up with billions of dollars to loan out to homeowners who wanted to remodel their horse barns?

The answer is that the Federal Reserve under Greenspan the Magnificent created this money literally out of thin air. The Fed lowered interest rates through various devices (e.g., FOMC purchases of assets with money created out of thin air) to unbelievably low levels, and this action allowed the banks all across America to loan out massive amounts of newly created dollars. This new credit drove up price of real estate to stupendous levels, drove up the wages of construction workers to absurd levels, and dramatically increased the number of people working in the building industries. (It also, incidentally, spurred illegal immigration, as Mexican laborers found it profitable to risk crossing the border to earn artificially high wages from gringo jefes who couldn’t find enough workers to keep pace with the feverish demand for their building services.

The result of this flood of mortgages and home equity loans was, as we now know, an unsustainable and staggering boom in the building industries. The ultimate responsibility for this unsustainable boom, moreover, was, as was just seen, the Fed and its reckless and unnecessary increase in the money supply which allowed banks to loan out massive amounts of new cash which was subsequently spent on construction. The boom was thus not an expression of increased consumer demand for homes and $40,000 roofs. On the contrary, the boom represented an artificial and destructive bubble that could have been and should have been avoided with sound money (i.e., gold) and 100% reserve banking.

It also should be clear, moreover, that in order to continue this massive boom in construction the Fed would have to continue to artificially increase the money supply in the credit markets. This the Fed could indeed accomplish (and the Fed is in fact moving in this direction with its series of recent interest rate cuts), but the effects of propping up the unsustainable boom would be more damaging than letting the housing recession simply run its course. This is true, in the first place, because if the Fed floods the economy with more and more paper money and credit, this will merely postpone the inevitable recession and massively increase price inflation. Moreover (as I’ve written before), this price inflation will eventually make its way into the credit markets anyway, as banks tack on inflation premiums to their loans to deal with rising inflation. These inflation premiums will reduce the amount of credit available on their own (since businesses and homeowners will have to pay much higher rates of interest), because higher interest rates will, ceteris paribus, reduce demand for credit. In the second place, were the Fed to continue to inflate the housing bubble, this would temporarily induce even more people to move into the building industries, when, as was also seen above, a major part of the problem with the building industries is that there are already too many people working in construction.

….The final advice I have for everyone associated with the building industries is to support the candidacy of Dr. Ron Paul for president. As was seen above, the source of our impending misery is the Federal Reserve System, and the destructive boom-bust cycle which the Fed inevitably creates. Dr. Ron Paul is the only politician in the past fifty years who understands what the Fed has done to the U.S. dollar, interest rates, and the housing market, and he alone has vowed to return stability to the American economy through peace, sound money and radically lower taxes.

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