And Now Here are a Few Words About Prices

In my opinion the entire "financial crisis" (which led the bankers and other power elites to come begging for a "bailout") is the result of too many people borrowing too much money for houses for which they overpaid. In other words, the prices people paid for houses in 2005 are higher than the prices people are willing to pay for houses in 2008 (and probably 2009 through some time a few more years from now).

And speaking of prices, Lew Rockwell, a smart guy and an expert on Austrian economics, including the business cycle as explained by Ludwig von Mises and Frederic von Hayek (work for which Hayek was awarded the Nobel Prize in Economics in 1974, by the way) offered up the following paragraphs about prices in this recent article. It really helps me to understand this stuff when writers put it in to a sort of everyday context. I like when folks do this.

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But does it mean that the economy is going to tank and we will all suffer? On the contrary, it could mean that we can begin an economic recovery from the Fed-generated bubble that should have and would have burst years ago but for artificial props by the Fed. If the stock prices of these troubled institutions can fall to where they need to be, they can be taken over, and their assets used productively and traded by the market. Once this deleveraging takes place, we will be ready for a new round of economic growth.

You have to understand how ridiculous this whole debate looks to anyone who understands the price system. Let's change the example from houses to apples to see how silly it is to suggest that falling prices can be made to rise. Let's say that the Fed created an apple hysteria that drove the price from $3 per pound to $10. Stores loaded up and even used them as collateral for expansion. Suddenly the price collapsed to $5 and finally to $2.

Now government takes notice. What can government do to deal with the problem? It can try to boost the price of apples by forcing stores to raise their prices. But what about consumers? They won't buy at $10. So the apples sit and rot. Maybe government should buy them all or force consumers to buy them. Also perhaps stores will just not buy any more at all. Government could force them to. But it can't force them to stay in business. People can always walk away. So perhaps government can just buy the stores, all in the interest of keeping the price of apples up. But it will have to buy the apple-leveraged stores at a much higher price than the market would offer, so this is a bad economic deal on the face of it.

The tangles can get ever more complicated and billions and trillions can be spent. You can put everyone in a prison camp and force people at the point of a gun to buy and sell apples at $10. But in the end, the problem is still the same: the price of apples wants to fall. Nothing government does changes that one fact. To attempt to change it is like trying to change gravity. Of course, the government’s central bank can raise all prices through inflation to the point that apples do in fact cost $10, but this is purely cosmetic. In fact, in real terms, the price of apples is still $2. It is a pointless and destructive activity to try changing this. You only cause massive damage in the attempt.

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And the principles are the same if you're talking about houses (as we are in 2008) as apples. If people are no longer willing to pay the high prices of 2005 that's just how it is.

By the way, please keep in mind, the true fly in this financial crisis ointment is the Federal Reserve Bank and the true poison those folks have been passing around is overly cheap credit/money.

And finally, stay alert. Because I'm sure the bankers who are so desperately in need of our money will be back. They'll figure out some way. I saw earlier this morning on intrade.com that folks were trading at an approximately 80% chance that the U.S. government would do some sort of bailout of these financial institutions by the end of October 2008. I hope they're wrong.