In a normally functioning economy, with a stable currency, and as little manipulation as possible, markets demand restraint and wisdom to be entered.  Easy money is myth, and there are no sure things.  Obviously for the past 30 years and maybe longer our government has taken a policy, that in fact there was easy money to be had  in real estate and housing investment, through both a policy of subsidy and easy credit.  This manipulation of a certain market was the ultimate scam.  Unlike other government programs which seem to target a very limited portion of the population, this policy seemed to make everyone happy and therefore no one complained, until now.

Traditionally, business including banks invest in the best bet.  When they know a government policy will affect a market, the money like water follows to that path.  The unintended consequence of this particular policy diverted money from other areas of production…  This is not to say that new homes did not increase US manufacturing capacity, but much of this manufacturing capacity was not stateside, as most of our homes, although built from U.S. based goods and services, are furnished with foreign goods.  Nothing against foreign goods, but when they are purchased directly related to a market manipulation it does call policy to question.

Now that economic recovery is being once again planned, I see a backlash in real estate investment and a push for higher order goods and services being the focal point.  I am concerned that like the housing bubble which took money from other areas of manufacturing, a new bubble could be created due to market manipulation.  Could our best intentions of restarting our economy through investment in small business, venture capital firms, new energy etc. cause the same ill effects 30 years down the road?  Would it be so bad to remove manipulation? We might just get a more diversified, less hectic bubble economy.  I know of 307 million regulators who I don’t think would do such a bad job deciding what’s best,  if they could only see the picture clearly.   The problem is that I also see 307 million people who see a government who could protect there interest, and very likely at the long term cost of everyone.

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Why would people(I am going to call Banks, and businesses people), enter into such high risk agreements?  Knowing full well, despite being labeled as low risk by rating agencies, what was contained in the bundled loans.  The pursuit of this answer led me to the following conclusion.  When reality is manipulated, reason is undermined.

Reality has been warped in this country since before the great depression.  The currency which we all find useful and powerful has been the driving force of market manipulation.  Our current system since Nixon is a Fiat money, of which its supply can be manipulated by the Federal Reserve.  The Federal Reserve(FED), has exclusive power over currency in the US without exception.

The supply of money took a startling turn for the worse in the late 70′s when turning from a loosely gold backed currency to a complete Fiat currency under the Nixon administration.

So long as the Fed kept printing money home prices were bound to continue to rise, it had to end somewhere.  Before it did end a lot of people, like water, took the path of least resistance and hedged there investment bets on a long trend.  Banks saw even the highest risk homes foreclosing as a no risk proposition… if the person stayed in the house and lost their means to pay, they could sell it for more, and if they couldn’t the bank could.

I will admit the simplicity of my argument overlooks many other factors, but the fundamental principal is true.  A manipulated currency caused our problems.  A currency which by government decree could open the floodgates and manipulate markets, thus causing reckless risk taking.  The   inflation seen in third world countries was excepted by us homeowners in the raising values of our homes as a net benefit.

Home prices like all other goods, needs to be left to free markets to fluctuate based on supply and demand.

Josh

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