The economic crisis brought a quote to rememberance that I want to touch on. It goes something like this: "The Free Market will Correct Itself...". Or something close to that.
So, I went to the Internet and starting looking up that quote in association with Alan Greenspan. I wanted to see in what context Greenspan was using that saying.
I didn't really find anything I could use but I did find this interesting article.
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Alan Greenspan's Meaningless Statistics
by: Michael Steinberg posted on: August 14, 2008
The Wall Street Journal's “Greenspan Sees Bottom In Housing, Criticizes Bailout” shows just how stubborn the former Federal Reserve chairman has become. Endlessly out to defend his record, he even wrote a new chapter for his book. The paperback version will be out next month.
The Journal reports Greenspan studying endless statistics, charts and graphs: 800K vacant homes, the quarterly S&P Case Shiller National Home Price Index, and his old time favorite “owners’ equivalent rent”. At a certain price it will be rational to own a home, according to Greenspan. When the market finds that rational price, equilibrium will be achieved and the excess inventory will be used up.
Once we have price discovery, we will know home equity value and mortgage related assets can then be accurately priced. At that point financial institutions will stabilize. Doesn’t Greenspan sound rational? I wrote "Foreclosures will Moderate as Home Prices Continue to Fall" disagreeing; financial institutions will stabilize well in advance of price stabilization.
Greenspan believes that supply and demand will be in balance with a bottoming in the first half of 2009. But, he qualifies that does not mean home prices stop falling. He just means that the supply and demand will be in balance. Greenspan enforces his argument by relating homes to commodities, and reminding us that he traded copper 50 years ago.
Why do I say that Greenspan’s analysis is meaningless? First, homes do not behave like commodities. They are not as fungible as one pound of copper is to another, and industrial markets are different than consumer markets. Second, statics do not take into account the increased cost of operating a home, stagnant wages of the last decade, tighter lending standards, and weaker consumer balance sheets. Third, statics do not take into account that much of the overstock of housing created during the boom is not consistent with current lifestyles. McMansions built during the boom are now about as valuable as SUVs. Therefore, many vacant homes are either worthless or might take years to sell.
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What does it all mean? Lets isolate one section of that article.
"At a certain price it will be rational to own a home, according to Greenspan. When the market finds that rational price, equilibrium will be achieved and the excess inventory will be used up.
Once we have price discovery, we will know home equity value and mortgage related assets can then be accurately priced. At that point financial institutions will stabilize."
That little section right there is basically saying that the Free Market will correct itself. But the problem with that is the government bailout. Once the government gets involved, then the Free Market isn't allowed to correct itself.
OK, we know that! We know that! The real question is what are we going to do?
Well, first we have to identify who's in danger here? The people? I don't think so. People will survive one way or the other even if they have to eat beans and rice everyday, 3 times a day. Hey, it fills you up!
The nature of the economy is for it to go up and for it to come back down. That's just life. So, what's really in danger here, with all the bailouts, is the Free Market philosophy.
I am convinced that the Free Market will, indeed, correct itself...except for one little thing. GREED! The Free Market is at the mercy of the business community. The business community is filled with too many people who have spend their lives trying to manipulate the system instead of appreciating the Free Market philosophy. In other words: They practice Corruption!
A perfect example of this is the Board of Directors of institutions like Fanny Mae and Freddie Mac. They took the system for all they could.
What's to be done about it? That's an easy question to answer: REGULATON!
Regulation in the business community is a four letter word, but due to the greed on Wall Street it is a word we have to use to get this economy back on the right track.
But we're not talking about Regulation across the board in the business community. We're talking about Regulation for businesses that take advantage of what people are reliant upon for their everyday use.
FOR EXAMPLE:
Big Oil
Power and Electricity
Insurance
Banking Institutions
Telephone Companies
These are the businesses that are in need of regulation because people are forced to buy or use the products provided by these institutions because of their practical everyday use. There really isn't a Free Market when it comes to these institutions. These institutions have the market sown up and therefore they do as they please. And what they do, as we are witnessing, is apply their greedy practices to defraud and cripple the Free Market philosophy.
There's no way for the Free Market Philosophy to survive as long as these institutions are allowed to manipulate the system with their greedy practices. With the corrupt and greedy practices that are being applied to the Free Market, the survival of its philosophy would be impossible to maintain.
So, again, who's really in danger here? The Free Market Philosophy! In other words: We are witnessing is the decaying of our society's philosophy right before our very eyes.
What to do? Mandate Regulation on Big Oil, Power and Electricity, Insurance, Banking and the Telephone Companies.
These institutions are the ones who are gobbling up huge profits at the expense of the consumer in a Free Market society. Regulate them and the Free Market will surely correct itself.
For those who don't know why and how regulations work. Here's a link to get an idea.
In December 2001 Enron became the center of another scandal when its bankruptcy, the largest to date in the nation's history, revealed that the company had used deceptive accounting practices to inflate its earning reports and stock price. This was the first in a series of corporate bankruptcies to involve fraudulent bookkeeping that shook an already weak stock market in 2002. To restore investor confidence, the federal government exercised its regulatory authority to promote greater scrutiny of the securities, accounting, and power utility industries.
In other words: They were practicing corruption! And with that type of corruption the Free Market cannot correct itself.
With that said: The fundamentals of our economy are strong! No, wait! The fundamentals of our economy are very very strong! But the fundamentals are being stressed by the greed of Wall Street, who don't even work for a living. They speculate with money that isn't even theirs.
The working people of America are the fundamentals of our economy. The fundamentals will hold. But the structure which are built upon our fundamenatals have got to come down! If this greed isn't checked then it's quite possible that America is headed for a Paradigm shift and who knows exactly what that will lead to.
What is a paradigm you ask?
Paradigm: a philosophical and theoretical framework of a scientific school or discipline within which theories, laws, and generalizations and the experiments performed in support of them are formulated ; broadly : a philosophical or theoretical framework of any kind. (The Free Market fits this definition of paradigm.)
What that means is this: Everything you see with your eyes and is registered in your mind as "normal" is the paradigm that you're operating in. Now if the Free Market were to collapse then the American paradigm would change and how you think would also be effected. What does that mean? We don't know because we're so used to thinking in a certain way that we would be in shock if something like that happened to us. But if the greed of the business community continues...we'll be forced to have to reevaluate everything we believe in.
This is the type of thing that has led to the destruction of every world power in the history of mankind. When world powers collapse due to corruption then that is what we call a "World Paradigm Shift". If this were to happen in the United States of America then the Constitution itself would also become vulnerable.
Believe it or not but the constitution of the United States of America isn't going to last forever. Corruption will and has destroyed every world power in the history of mankind and the United States of America is not above the history of the world.
REGULATION BEFORE IT'S TOO LATE!
mike t.
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