Hi all,
I was wondering how the Austrian School would explain the behaviour in financial markets regarding the creation of sub-prime mortgages, mortgage backed securities, and irresponsible behaviour of those involved.
My knee-jerk reaction was "Oh, if there had been more regulation, tighter controls of those greedy bankers etc. none of this would have happened." From what I've heard, I'm not alone. People are talking about an end to capitalism - or at least laissez-faire.
If you check out the Marxist sites, they are practically jumping up and down with glee.
I myself feel too worried about the situation to think like that. Just think of how people would suffer if that was the case, rich and poor.
I also have a nagging doubt as to whether it really is that simple - and so was intrigued to read that some think it is regulation that is part of the problem!
If anybody here could explain your views on this I would be interested to learn something new!
Thanks,
Herne.
The Marxists do so for no good reason. Do you want articles explaining the Austrian view?
-Jon
To darkness I condemn you...
Thanks for replying.
Yes please, that would be great.
There's a great many articles on the topic, so I'll have to look up a couple. If no one else does so before me, I'll link a few later on.
There's this: mises.org/story/3128
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Right here.
Mises Community Natural Rights Discussion Group
Thanks for the replies!
H.
A good one:
http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx
Time will tell
Hi Herne,
Good question. One of the major problems that most have in understanding the current issues is realising that the problem is systemic and on a macro economic scale. Government intervention and bailouts (also known as market maniupulation) is part of the reason we are where we are today. In short, Austrian school would suggest the way to fix this mess is to have limited government, less regulation, stop deficit spending, abolish the FED and have a return to sound money that is backed by gold. Whilst I agree, it's not going to happen right now. The system operates and needs large government, more regulation, deficit spending and the FED to survive. The are many sound arguments explaining all of the above and this site is the best site in the world for understanding whats going on, how and why we got here etc. The more you learn literature/articles and audios the more you will realise that these guys know what they are talking about - infact you will find they predicted everything to such detail it will make you feel like you are reading articles written after the events.
You couldn't be in a better place. I will try and explain in detail for you re: sub prime, mortgage backed securities etc in next post.
Matt
Matthew
www.jwspaidtosave.com/asiapacific
In order of questions asked will try and simplify for you:
Sub prime mortgages: In 2000/2001 the US for various reasons was headed into a long and drawn out recession after excess investment within the technology sector during the preceeding 10 years. The bubble burst. In order to save the economy at the time the FED courtesy of Alan Greenspan began lowering interest rates from around the 5% range eventually to 1%. This created the property bubble. Prices soared because of new money that was created out of thin air to do that (that's another topic if you haven't learnt about FIAT currencies?) which flowed into property. property values soared, and soared and soared. After a couple of years houses were becoming so expensive that Congress allowed 'adjustable rate mortgages' to be issued. You can borrow at low rates to help you get into the market and then after 5 years your interest rate will reset to the prevailing rate of the day - the masses flocked to banks, no money down, no jobs, lying on applications - whatever it took. the masses didn't allow for 60% increases in their mortgage repayments whe these rates reset however. They couldn't pay the monthly payments and therfore defaulted. This was a trickle then a tidal wave all over the country. I know it's simplistice but trying to keep to a minimum. Next up were those mortgage backed securities. Traditionally banks have made loans and taken the risk that went with those loans. Not anymore. banks were able to make the loans but offload the risk to investments in the form of securities mortgages. It works like this. A bank has made 1000 loans. within these loans exist 600 solid mortgages, 200 suspect and 200 totally dodgy loans. The banks package them together under one banner and call it the 'long term property growth fund' They then determine a price for each share in this fund normally known as the unit price. This then becomes a bank investment product.The bank has in effect been a broker in the deal but has shifted responsibility from themselves to the public and other investors such as your IRA or retirement account managers when it comes to defaults. Unit prices then came crashing down as people on the other side of the securitised mortgages - the home owners defaulted on their loans. The bank has not born the brunt but has taken a nice fee for setting up the deal... ofcourse as you can see the bank has incentive now to give 100% of their applicants loans as they pass the loan on to investors after the transaction has been made. So if you could fog a mirror you got a loan. There are many other aspects includind CDO's or collatarised debt obligations where banks/hedge fund managers slice and dice these securities repackage them and sell them to market again - you had the worst of the worst loans being sold as AAA lending products - a disaster waiting to happen. The problem with current situation is that assets are not being allowed to go to their true worth - that might mean zero. You get told the markets are illiquid. They are illiqued because they are over priced and the market has valued them at less than people are wanting. If you paid 4 million for a 1 million home and you can't sell for 4 million the home is not illiqued it's overpriced. It would not be illiquied at 1 million. But government is buying up 'illiquid' or worthless assets at the tax payers expense. Bailouts = inflation = you better have have some real money such as gold and silver on hand over the next few years. The world could have had a reasonable resession, now we are guaranteed an inflationary depression by 2009 -2011. History proves that the only people who can turn a recession into a depression is the government - they are playing their part to a tea.
The long of it:
http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf
The short of it:
http://www.lewrockwell.com/thornton/thornton33.html
Also, there are a ton of articles on this issue here and here.
In Britain the government has bought large stakes in the banks, and asked (coerced) them to sell mortgages at the same level they did in '07.
The consensus opinion is basically "happy days are here again" and that it is the "right thing to do", and share prices have gone up today (although the inter-bank lending rate is virtually unchanged).
Judging by what I've read here, it was the wrong thing to do.
Does anyone have any predictions for what happens next in this case?
H
First of all, why on earth would you go to the Marxist sites?!
And, well, you could always tell them to go to North Korea. They don't have financial crises over there. Of course, they don't have enough food either ;)
If I hear not allowed much oftener; said Sam, I'm going to get angry.
J.R.R.Tolkien, The Lord of the Rings
Natalie: If you check out the Marxist sites, they are practically jumping up and down with glee. First of all, why on earth would you go to the Marxist sites?!
I know. I feel like I've been to a very dark place lol.
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap