Necessary but not Sufficient

There were two blog posts about the housing bubble published at the von Mises Institute blog recently: “ABCT and the Community Reinvestment Act” and “Garrison on Housing Policy and ABCT“.

The former points to research that claims to show that government policies designed to promote home ownership played a large role in fomenting the subprime mortgage market bubble.

The latter, along with the conclusion of the former, correctly points out that government housing policies were necessary but not sufficient to cause the vast expansion of the subprime mortgage market. As both authors, Peter Klein and John Cochran, clearly point out, enormous malinvestment episodes in the current monetary and banking regime are always caused by the central bank lowering interest rates below what would emerge in a free market.

Austrian business cycle theory (ABCT) only claims that a lowering of interest rates by the central bank will cause distortions in the capital structure of the economy. Such distortions will eventually be corrected in the inevitable bust. It is important to note that ABCT makes no claims about what sectors of the economy will experience the artificial boom. This depends on a complex relationship of laws, culture, technology, etc. that cannot be predicted. It is only in hindsight that economists can determine the reasons why the boom occurred in particular segments of the economy.

Thus, economists can look at the data and determine that government policies to encourage the expansion of home ownership were a necessary condition for the vast expansion of the subprime mortgage market. While, Austrian economists point out that such policies were not sufficient, and that it was the lowering of interest rates by the fed that was necessary and sufficient.

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