Tuesday, April 21, 2009

Cure To The
Global Economic Crisis

... is worse than the disease

by P.J. O'Rourke - April 20th, 2009 - The Australian

[Adam] Smith spotted the cause of our financial disaster 232 years before 2008. "A dwelling house, as such," he wrote in The Wealth of Nations in 1776, "contributes nothing to the revenue of its inhabitant." He went on to point out that, even if the house were rented "as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue".

So Smith concluded that "the revenue of the whole body of the people can never be in the smallest degree increased" by a bunch of ugly condominiums and tacky housing developments. Voila! Sub-prime mortgage meltdown.

For Europeans of Smith's generation, the "speculative bubble" was a defining disaster of history. This was their Gallipoli in a financial sense. The South Sea Bubble and the Mississippi Scheme had blown up just a couple of years before Smith was born. There were at least 100 other bubbles just as famous. And while Smith was in Scotland writing The Wealth of Nations, the collapse of a real estate boom set off a run on Scottish banks. Only three of Edinburgh's 30 private banks survived.

The reaction of Scottish investors sounds very familiar. Smith wrote that the speculators seemed to have thought that "the banks were in honour bound to supply the deficiency, and to provide the speculators with all the capital which they wanted". Smith knew that speculative bubbles were not caused by the free market. Speculative bubbles are the result of a breakdown in something -- sometimes common sense, sometimes rule of law -- but they're not the result of a breakdown in market freedoms.

It is so true that there is nothing new under the sun. P.J. O'Rourke reminds us of this in a lesson from the famous Adam Smith. Our current crisis in Real Estate is simply the traditional crisis caused when people get focused on a bubble and start believing it will never burst. Bubble's are not caused by free enterprise. Bubbles are not made worse by free enterprise. Tyrants merely use bubbles as the excuse to steal your freedoms when they blame free enterprise. Sort of how Obama and the Democrats are doing today with the housing caused banking crisis.


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