A Good Explanation of the Housing Bubble

On George Reisman's Blog, I found an excellent explanation of the current mortgage problem. His post has essentially the same information as my post on The Subprime Mortgage Lending Scam.

From time to time, the Federal Reserve has to slash interest rates to avoid a deflationary depression. The Federal Reserve causes a massive amount of money to be poured into the financial industry. The Federal Reserve always has a credible weapon for fighting deflation, because it can always print more money. However, the Federal Reserve does not dictate where this money is actually spent.

In each money supply bubble, a different part of the economy is deluged with speculators. In 1999, it was .com Internet companies. In 2002-2004, it was mortgages and housing. I don't know what it will be next time.

When the newly printed money starts accumulating in one part of the economy, prices skyrocket. Newspapers and television tout it as being the new "hot investment area". Eventually, everyone is investing in this "hot area". At this point, the Federal Reserve is concerned about inflation and jacks up interest rates, causing a crash. The insiders start buying at the start of the bubble, and sell before the crash. You don't know how long the boom cycle or bust cycle will last, because you don't know what the Federal Reserve is going to do. The bust occurred sooner than I expected it would. It was just a few months ago that the stock market recovered to its old record highs.

The basic structure of the monetary system guarantees that price bubbles will occur. A different segment of the economy gets devastated with each boom/bust cycle. Instead of addressing the fundamental flaw in the monetary system, new government regulations are enacted to control the segment of the economy that was devastated in the boom/bust cycle.