Political Solutions for Political Problems Part II

Thomas Sowell starts his latest article with: "We don't look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating. " I can get frustrated when I hear family members, friends, or strangers talk about which candidate for president will do the best in solving the problems our county has. They wish they would fix the housing crisis, the financial institutions mess, our airlines, gas prices, and I could go on and on. Most of us who study history and economics and have principles which foundations are built around the ideas freedom, private property rights, and federalism, would rather have a politician stand up and say "When elected I promise to take government out of the business of regulation and interference in the free market. I promise that when a slow down in our economy comes about that I will do NOTHING other than look for other ways to keep us in Washington from screwing everything up!"

In addition to government passing laws that incentivize and in fact force banks to make loans to people and in places they otherwise would not, local governments pass other laws that artificially raise the cost of housing. When a local government puts price ceilings on apartment rentals the amount of housing built in those areas goes down with landlords moving into other areas around the country where they can actually make money. In addition to that, current apartments are no longer maintained and thus are abandoned. All this lowers the supply of housing and thus what happens to the price? If you said it goes up then go to the front of the class. This is why housing is so much more expensive in cities like San Fransisco and New York. When citizens want to buy a house they must get a loan that is larger than they would if such regulations and restrictions were not around which would lead to more building and a lowering of prices. This adds to the housing bubble which bursts as interest rates go back up.

The Federal Reserve kept interest rates so long for so long that many people got loans at very low rates that adjust as the Fed raises their rates. This effects poor people who have to get adjustable-rate mortgages. When the rates go back up on those people who have gotten loans only due to the fact that government forces financial institutions to loan to them, payments increase. This is the "sub-prime" loans we hear about in the news. In areas around the country like in California where a half-million dollar house is the norm, a 4% interest being raised to 6% would mean a rise in about $7,000 a year in mortgage payments.

In a true free market people on the bubble of affording housing would choose to save more while living in a rental apartment that does not cost as much now due to a rise in supply with no regulations on price and zoning laws being greatly reduced. Furthermore without political pressure in Washington the interest rates would not be kept so artificially low for so long. Interest rates being too low incentivizes people to get loans many of whom should not. Interest rates being low also causes the value of the dollar to fall. This eventually leads to an increase in inflation which the Fed must get under control by raising the interest rates back up. This would eliminate most of the huge ups and downs in the economy. More and more economist now blame the New Deal policies for making the Great Depression worse and last longer. In 1987 the stock market crash was just as bad if not worse according to economist Sowell. This time Reagan did nothing. This was not well received by the mainsteam media and many other politicians. All that happened was 20 straight years of huge economic growth, low inflation and very low unemployment rates.

I hope these last two blogs will help you readers realize the beauty of the free market and how politicians cause the problems that they now promise to fix. When I vote I have to vote for the candidate that promises to interfere less than the other. I would love to have a candidate that would never interfere but I know I live in the real world where these facts mean little to politicians trying to get votes.