“Prices Must Be Free To Tell The Truth”

by Mario Rizzo

I am not sure who first said this but I believe it was the economist Benjamin Anderson (although Arthur Marget has been credited). In any event, Henry Hazlitt promoted the statement.

I think the very interesting opinion piece by our regular guest-blogger, Jerry O’Driscoll, in today’s Wall Street Journal is in the tradition exemplified by this post’s title. But there is something more. The article shows that falling prices (both absolutely and relatively) in particular markets are not a bad thing for the recovery process. Naive Keynesians get upset anytime an important price goes down. Oy gevalt! What will happen to aggregate demand? There will be a cumulative decline, and so forth.

Recovery doesn’t mean maintaining or going back to unsustainably high prices. (I offered my two cents in the Freeman.) It must involve readjustment of relative prices as a result of the credit-boom and bubble generated distortion of relative prices. Jerry’s article reminds of us all of some basic truths.

Thank You, Alfred Marshall

by Mario Rizzo  

This is not the whole story. But it is reassuring to see that the Great Recession has not repealed the elementary Law of Supply and Demand.  From the Christian Science Monitor:

“Sales of new homes in the United States rose to their highest level in seven months, providing one of the strongest signs that the decline in the residential construction industry may be over.

But to achieve that stabilization, home builders are continuing to lower prices to lure new buyers – a phenomenon taking place in real estate markets around the world.

In June, the sales of new US homes jumped a higher-than-anticipated 11 percent from the level in May, the Commerce Department reported  Monday. The new report suggests that the home-building industry is nearly halfway back to its June 2008 level of sales, after hitting a record low in January (seasonally adjusted).

The problem is that the sales prices continue to fall. In June, the median price of a new home fell back to $206,200, down from $219,000 in May and not much better than the multiyear low of $205,100 in March. Prices for new homes haven’t been this low since December 2003.”


Recovery and the Irreversibility of Time

by Mario Rizzo  

An increasing number of articles in the popular press are claiming that signs of economic recovery are becoming more numerous. That may be. However, I am not an economic prognosticator and so I don’t know what to make of that.  

There is a more basic question. What do people mean by “recovery”? It seems that, if articles in the Wall Street Journal are any guide, recovery is often taken to mean a return to normalcy in some key markets – in particular, the housing market.   Continue reading

Rising in Phoenix: Entrepreneurial responses to housing and health-care problems

by Sandy Ikeda

The New York Times, in “Amid Housing Bust, Phoenix Begins a New Frenzy”, reports that “Real estate got just about everyone into trouble in Phoenix, and the thinking seems to be that real estate is going to get everyone out.”

If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.

Phoenix is also where “supermarket health clinics”and urgent-care centers for the uninsured have proliferated.  Some have been able to adjust quickly to a souring economy.

Health clinics located inside grocery stores typically offer less-comprehensive medical service than urgent-care centers such as NextCare and Maricopa Urgent Care…  NextCare, which has 17 clinics in the Phoenix area, has responded to the downturn with a series of moves aimed at reaching more patients.

Read more about it in this story from AZCentral. Continue reading

The Fed Against Equilibration

by Mario Rizzo


Reality is more complex than our models. Free-market forces are asserting themselves but the Fed is also intervening and trying to affect those forces. Real-world data is the result of both factors.


The Commerce Department  has issued some new data showing that house sales are rebounding (but still off their year-ago levels) and that house prices are falling. This is to be expected as supply and demand begin to equilibrate. Continue reading

Reflating the Housing Bubble?

by Mario Rizzo


In an effort to prevent deflation, the Fed has now decided to do more quantitative easing, that is, to buy with newly created high-powered money various assets aside from short-term Treasury securities. Over the next six months it will buy up to $300 billion in long-term Treasury bonds.


It will also purchase additional mortgage-backed securities (MBS) in the amount of $750 billion as well as up to $100 billion in additional securities of Fannie and Freddie (to a total of $200 billion). These are the parts of the new policy that concern me most. They are bad ideas. Continue reading

An ally on the left? And bleg results

by Sandy Ikeda

This passage is from a piece in, of all places, Scientific American, from, of all people, Jeffrey Sachs:

During the decade from 1995 to 2005, then-Federal Reserve chairman Alan Greenspan over-reacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the Y2K computer threat, which of course proved to be a false alarm. When the Fed subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed put interest rates down to 1 percent and thereby helped to set off the housing bubble, which has now collapsed. Continue reading

Taylor Rule and Fed Witches’ Brew

By Chidem Kurdas

Bubble, bubble, toil and trouble—that’s an apt metaphor for the Federal Reserve policies meticulously dissected by Stanford professor John Taylor, in the Wall Street Journal and other places.  He shows that the Fed set the financial crisis in motion and then made it worse.

Relative to the pattern that held since 1987 – a standard that has come to be known as the Taylor Rule – the Fed kept interest rates exceptionally low in 2002-2006.  Easy credit got real estate prices bubbling, which convinced folks that property prices go only one way and concealed the risk of price declines. Hence homeowners, developers and banks over-extended themselves.

Once the credit bubble collapsed in 2007, the excessive debt became rancid. Taylor argues that the Fed mis-diagnosed the problem as a lack of liquidity. Once again opening the spigot and cutting US rates, it brought down the US dollar. The price of oil, being denominated in dollars, consequently went through the roof. That wrecked household budgets and people responded by curtailing consumption. Thus economic conditions worsened. Continue reading

Why Obama’s Stimulus Won’t Work and What Might

by Mario Rizzo


The fiscal stimulus package has passed. But the argument is not over. I gave a talk at the Club for Growth-Heritage Foundation conference, “Economic Recovery: Free Markets vs. Big Government” this past Tuesday just as the bill passed the Senate. I have linked the text of my remarks here. My four key points are:


1. The central cause of the current economic state of affairs is bad monetary policy from 2002 through early 2006.


2. Stimulus should not stimulate or reinforce the misallocation of resources.


3. Stimulus should create economic value and not destroy it.


4. The best stimulus consists of incentive-relevant tax reductions. Continue reading

Illusion of Confidence and the Confidence of Illusion

by Mario Rizzo


One hears a lot about restoring confidence in the economy these days. What is that? The economy is a complex entity. In fact, Friedrich Hayek wanted to drop the use of the term and replace it with “catallaxy” that is, an abstract order of interpersonal exchanges. The word “economy” has its origins in the idea of household management and consequently of a household manager. It is remarkable how the etymology of the word is preserved in its current meaning (or, at least, connotation). Most macroeconomists seem to believe that the economy can be managed or steered out of its current difficulties. (Is it cheeky to ask how did it get into its current difficulties if management were possible?)


Now the latest is Olivier Blanchard arguing that what fundamentally ails us is “Knightian uncertainty.” If this can be made to go away then our economic difficulties would be many fewer and far less severe. To accomplish this, he proposes the usual array of stimulus. So all of that to get to the “consensus policy.” Continue reading

The Macroeconomic Knowledge Problem

by Mario Rizzo


The Keynesian world view is leading to increasing stridency and dogmatism about economic stimulus. There used to be a joke that you can teach a parrot economics – all it needs to say is “supply and demand.” Now we can say that it is even easier to teach a parrot the policy prescription to prevent or cure a major recession: all it needs to say is “stimulus.” Most of the attention thus far has been on fiscal policy and the gathering of ideas on how to spend federal money. (For example, see the New Yorkers’ wish list.)  


The new Obama Administration, like the Bush Administration, has signaled that another part of the stimulus program is to put pressure upon banks that received TARP funds to stop worrying about their balance sheets and get out there and lend. (Query: To whom, for what purposes and at what interest rates?)


So how is this stimulus supposed to work? Continue reading