Wednesday, February 11, 2009

Henry Hazlitt Predicted Housing Crisis in 1946

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment.

~From Chapter VI "Credit Diverts Production" in Henry Hazlitt's "Economics in One Lesson," first published in 1946

HT: Ayn Rand Center for Individual Rights

19 Comments:

At 2/11/2009 3:11 PM, Anonymous Machiavelli999 said...

Explain the housing bubble in Britain and Spain then.

No CRA. No Fannie and Freddie. Not even tax deductions for mortgage interest. And yet, still major housing bubble and a bigger crash than in the US. At least for Spain.

Facts > Idealogy

 
At 2/11/2009 3:31 PM, Blogger lineup32 said...

Thanks for the quote, clearly it will take years to work off the excess housing created by political corruption masked as promoting growth and jobs.

 
At 2/11/2009 3:34 PM, Anonymous Anonymous said...

Another quote from an Austrian. HEROIC Prof!

 
At 2/11/2009 3:42 PM, Anonymous Anonymous said...

Europe has for a long time subsidized housing. See http://www.articlearchives.com/government/public-finance-taxes-taxation/1563263-1.html

That, and global speculation let to their bubbles.

--Again, loose (subsidized) lending. We will never learn.

 
At 2/11/2009 4:01 PM, Blogger bix1951 said...

As a small business owner I have learned that
"Regulation Happens"

Also
subsidies happen
stimulus happens
taxes happen
political favors happen
etc.

luckily humans are resourceful
we will always win over stupidity if we just trust ourselves

 
At 2/11/2009 4:02 PM, Blogger QT said...

Ed Glaeser has done extensive research on the factors affecting U.S. housing prices.

Glaeser points out that the increase in housing prices has not been uniform throughout the country. In fact, the most dramatic increases have occurred in places like Boston, Massachusetts and San Francisco, California, where permits for new buildings have been difficult to obtain since the 1970s. This, compounded with strict zoning laws, seriously disrupted the supply of new housing in these cities. Real estate markets were thus unable to accommodate increases in demand, and housing prices skyrocketed.

If one looks at the areas most affected by the housing bubble, they correspond to areas of extensive zoning and building restrictions. If only Fan/Fred & CRA were at work, we wouldn't see this.

 
At 2/11/2009 4:50 PM, Anonymous Daniel said...

Very interesting! A long time to wait before being validated...

 
At 2/11/2009 5:06 PM, Blogger Paul said...

"If one looks at the areas most affected by the housing bubble, they correspond to areas of extensive zoning and building restrictions."

QT,

Ok, but what about Arizona and Nevada?

 
At 2/11/2009 5:41 PM, Blogger randian said...

Ok, but what about Arizona and Nevada?

Not sure about Arizona, but for Nevada you pretty much mean "Las Vegas". LV is completely surrounded by government-owned land. It has no room to expand and developers can't buy any of that land. While LV is pretty developer-friendly (unlike anywhere in CA for example) the restrictions on available land are what cause extreme price volatility.

 
At 2/11/2009 7:50 PM, Blogger PeakTrader said...

"Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required" also makes some people more responsible, improves living conditions, adds to both current and future economic growth (e.g. buying housing-related goods and paying-down debt), generates real wealth (including through home improvements and building equity). In short, it raises living standards for some faster.

I stated before, the U.S. housing boom, generally from 1995-06, was created by "excess" capital, from a higher level of U.S. profit growth (including a record 20 consecutive quarters of double-digit earnings growth by U.S. corporations in the mid-2000s) and massive foreign capital infows (by export-led countries, which received up to 10% annual negative real returns lending money to the U.S.), and some of that capital flowed into the U.S. housing market.

The recent housing boom generated enormous real and nominal wealth. The nominal wealth has declined substantially. However, the real wealth still exists. Was Wall Street or the financial industry wrong for distributing wealth to the masses? I'd say it was needed to raise U.S. actual output towards potential output, because without the U.S. housing boom (and related goods), the negative output gap would have been greater throughout the 2000s.

 
At 2/11/2009 10:08 PM, Blogger Inquisitor said...

Whoever said FNM and the CRA were ALL there is to it? Republicans? So, what "facts" > what "ideology"? Sounds like trite platitudes devoid of substance.

 
At 2/12/2009 10:02 AM, Anonymous Anonymous said...

Wow, if the CRA, Fannie and Freddie aren't to blame, then let's just throw a few more billion on the fire and all will be well.

The leftards have already informed us that people who got subprime loans almost never default unless they have borrowed from a private bank.

And since the CRA is so wonderful, let's have Barney Frank and Chris Dodd direct all lending in the economy. Don't worry, if it all goes bust, Obama and the Dems can always spend us back to prosperity.

Pathetic.

 
At 2/12/2009 3:21 PM, Anonymous Anonymous said...

This doesn't appear to be in original text. Does anyone know if this was added in a later addition.
The page linked is the only place that has this paragraph.

http://fee.org/library/books/economics-in-one-lesson/

Lacks this paragraph as do a number of others. Is this authentic?

 
At 2/12/2009 3:32 PM, Blogger Mark J. Perry said...

Anonymous: It's from the original text, it appears on p. 47 in the version of the book I have, in the Chapter IV "Credit Diverts Production, at the end of Section 2.

 
At 2/16/2009 3:35 PM, Blogger VangelV said...

"Machiavelli999 said...

Explain the housing bubble in Britain and Spain then."

It is called inflating the money supply. Several commentators were pointing out the problem for quite some time before the bubbles burst only to be dismissed as losers or doom and gloom merchants. Well, they were right and the central banks and regulators created a crisis of epic proportions.

 
At 2/18/2009 9:38 AM, Anonymous vancouver real estate said...

Great! So it only took how long.. 63 years? I'm not saying anything against this author or his work with prediction it is always the same: you're either wrong, everyone forgets about it and life goes on, or you are right and when you finally are proven right, you start being quoted as if you "knew all along". Just my 2 cents.
Jay

 
At 2/18/2009 4:24 PM, Blogger VangelV said...

"I'm not saying anything against this author or his work with prediction it is always the same: you're either wrong, everyone forgets about it and life goes on, or you are right and when you finally are proven right, you start being quoted as if you "knew all along"."

You need to read the book, which is a classic, because you are taking the original post out of context. In Chapter VI, of Economics in One Lesson, Hazlitt simply argued against government meddling in the form of direct grants of credit or a guarantee of private loans because all such attempts to meddle lead to malinvestments and lower productivity.

The book is a very easy read and a great eye opener for most people who have been indoctrinated by the dominant schools of economics. In his powerful little book Hazlitt demolishes many of the false myths that dominated economic thinking fifty years ago and sadly, still do so today.

 
At 2/20/2009 2:28 PM, Anonymous enoriverbend said...

"You need to read the book, which is a classic"

Amen to that. As a non-economist slowly educating myself over the years, when I found Hazlitt's book I was astonished at the clarity of writing (and the clarity of thought). It's had a place on my bookshelf ever since; perhaps time to pull it down and savor it again one more time.

 
At 2/20/2009 5:00 PM, Blogger VangelV said...

"Amen to that. As a non-economist slowly educating myself over the years, when I found Hazlitt's book I was astonished at the clarity of writing (and the clarity of thought). It's had a place on my bookshelf ever since; perhaps time to pull it down and savor it again one more time."

You may also like to look at Man Economy & State by Murray Rothbard. As an aside, if you are interested in the subject of culture, you may wish to take a look at Paul Cantor's great lecture series on the economic basis of culture. Dr. Cantor has made a lot of my lefty artist friends see the light by presenting a very entertaining but persuasive argument that looks at culture from an Austrian Economics perspective.

http://mises.org/media.aspx?action=author&ID=322

 

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