Thursday, August 11, 2005

Brownstoner Remarks

Note: These remarks were made in response to this post on

The blame for this latest housing craze, and its ugly results lays partially at the door of the Fed which is responsible for this "cheap" money phase and it's accompanying disasters.

The masters at the Fed are all Keynesians, and in order to forestall a much-needed minor recession to correct the reckless spending of the dotcom era, they pump the system with more money (by way of lowering the rates and by purchasing treasury notes) in order to boost even more consumer and government spending- which was the root cause of the recession in the first place!

So instead of letting the market ride out the brutal, but usually short term recession (which in fact is a healthy function of the market, since it weeds out the less-efficient investments which were unsound business proposals) the Fed policies delay the less minor recession, and in its place they add an unhealthy housing boom which was partially encouraged because when interest rates are so low:

A) it's actually pointless to hold onto savings which don't generate enough bank interest to offset the price inflation, so you might as well spend it today and worry about it tomorrow (ask anyone who took and ARM or interest-only loan how they plan on paying for it tomorrow)

B) it lowers the barrier of entry for developers to build projects, so that any Joe Sixpack who is not experienced now can join the "everyone is a developer" crowd.

The results of inexperienced developers flooding the market with "cheap" money leads to first-time projects which don't really make sense when the rates are higher. You've got architects whom are overwhelmed with the sheer volume of new projects, so that they can't really dedicate their time and energy to designing the best structures. Or maybe the developers don't really care much about aesthetics, because it doesn't make a difference when consumers are spending everything but their last 2 cents.

1 comment:

Vache Folle said...

We've seen this before. Back in the go go 80's, banks and investors would throw money at any shopping center or office building you proposed. Every tom, dick and harry got into commercial development and built strip centers next to strip centers and office complexes in the middle of nowhere with no tenants lined up. The s&ls got into it big time, and we all took it in the shorts when the bubble burst.