There is no Free Lunch

The results of the housing bubble will be with us for a while

This is from a while back, but I think it is well worth reading. In this Wall Street Journal article from Nobel winning economist Vernon L Smith we look at the credit and housing bubble that is now having such a negative impact on the economy. Smith argues that in the long run the government bailout does not really address the fundamental problem and only delays the mechanisms that must take place.

The fundamental problem is that government actions in the past encouraged risky lending by banks and brokers that went to many people who had no business getting loans that they could not be expected to repay. Free market economists like Ludwig von Mises and F.A. Hayek would say that the attempts by government to make changes in the market, such as providing loans to sub-prime borrowers using a quasi-government entity such as Freddy Mac or Fannie May, only results in capital being re-directed from the most efficient uses to those which are not efficient. And in this case that is exactly what we have.

Very large sums of tax dollars have been flushed down a rat hole from which we will be lucky to ever see them again. In a rational free market where the government is not allowed to play god, this would not happen. Lenders would seek out the best borrowers rather than the worst ones.

But that is not how the leftist Democrats operate; they are continually in search of things to "fix" in the belief that they are somehow smarter that the market. The results are invariably disastrous, as we have seen in the housing market and the corresponding credit freeze. Just remember this when you see the now common stories on the news about how the government is going to "fix" the auto industry.

Now it is becoming accepted that we will bail out any industry that is in trouble. But what we should be doing is letting the market work out its own problems without interference. In a garden you sometimes have to weed. The same is true in an economy. Some businesses must be allowed to fail so that new ones that do a better job can take their place. It is not the job of government to pick winners and losers. The more so because they tend not to pick the winners as they do not need help in the first place.

And in the long term this sort of thing means certain economic collapse somewhere down the road. We just don't have the money to spend. We are, in effect, running up a huge credit card bill that will have to be paid at some point. That will mean higher taxes, a lower standard of living and a falling dollar. Sooner or later everything must be paid for. And with Obama's spending on top of Bush's, we will be getting one hell of a credit card bill.