Posts tagged Hoover

Source: http://www.forbes.com

By Steve Forbes, Forbes Staff

Arse Backwards: The Federal Reserve’s Approach to the Housing Market

This article originally appeared in the Mar. 26, 2012 issue of Forbes magazine.

In reaffirming its near 0% interest rate policy for another three years the Federal Reserve averred that this was ­necessary to revive the housing market, which, in turn, was necessary for the economy to revive. House building and the buying and selling of existing homes are meaningful parts of the economy. More important, from the Fed’s perspective a house is the biggest asset for millions of people; therefore, higher values mean owners will be more likely to spend.

This reasoning is arse backwards.

A strong economy—and minimal gov­ernment interference—would rapidly revive the housing market. People who want to buy houses, which includes most of us, buy them when we can ­afford to do so. Only during the Fed-­created bubble were millions of people with insufficient incomes purchasing homes with mortgages that were far beyond their capacity to service.

Let’s hammer this point home: ­Government and Federal Reserve “stimulus” for housing won’t put our economy on a vigorous and sustainable growth trajectory. Other things—sound money, low tax rates, less spending, repealing ObamaCare and Dodd-Frank—will.

The Fed’s reverse reasoning is not the first instance of this confusion of cause and effect. The first big occurrence came in the autumn of 1929, when the stock market crashed as the trade-­destroying Smoot-Hawley Tariff began making its way through the congressional legislative mill. President Herbert Hoover thought that by propping up wages the U.S. could avoid an economic contraction. He called major business leaders to the White House and got these moguls to agree to keep wages at current levels and not engage in layoffs. Like Bernanke with housing, Hoover didn’t grasp the fact that wage levels reflect market conditions. Keeping them artificially high doesn’t create prosperity. Astonishingly, these CEOs kept their word. Nevertheless, the economy went into a tailspin. Only in 1931, with a river of red ink staring them in the face, did these executives abandon their promise.

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