Free Market Solutions

Mark Thornton writes:

People often ask me, "What do you think the government should do instead of QE inflation?" My stock answer is that the government should not try to fight the depression with government spending and cheap credit. Trying to stop the market from correcting the errors of the past only delays the consequences and makes them much worse.

Government should balance its budget. There should be no new credit expansion by the Federal Reserve. Most importantly, government should not meddle in markets to try to soften the consequences of the correction. Specifically, that means no bailouts, stimulus packages, or new public-works projects. Do not prop up wages. Allow competition to lower the prices of land, labor, and capital. The only positive steps for government to take are implementing tax cuts and spending cuts, eliminating regulations, and allowing free trade.

Now, I have a name for this policy. It's called the "Lehman Bros. plan," after Lehman Brothers, the large financial firm on Wall Street that was allowed to go bankrupt in September 2008. This plan relies on allowing big firms to fail. Had this policy been followed from the beginning, I have little doubt that the crisis would already be over and we would not have added to the debt problem.

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Mark Thornton on the Economy

It would seem that under "normal" conditions that most of the economic crisis would have been over by now and that prospects for the future would be brightening. However, the world wide stimulus and bailouts have significantly slowed and distorted the normal correction process and may have set us up for the possibility of more stock market volatility and crashes, foreclosures, and unemployment in 2010.

If you take all the reporting about the economy and you delete everyone but those who actually study the real workings of the economy, rather than just statistics and government reports, the common themes are that government programs have failed to address the problems of the real economy and that things are actually getting worse, not better.

source

The Next Recession or Crash

The environment has now been established for the next stock market crash. Everything we do know about the economy is unsettling. Then there are the things that we don't know about, like the bailouts and stimulus plan. Finally, there are plenty of things that we have never even considered, like how does all this government intervention impact the people who currently want to buy "toxic" assets from banks or automobile factories in Detroit.

All this uncertainty and ignorance have left investors and entrepreneurs — the only people who can get us out of this mess — unhinged from the normal parameters with which they operate. The result is inaction and fear, conditions that make the stock market ripe for a crash....

The path to recovery is clear: cut taxes permanently, eliminate government programs, balance the budget, eliminate regulation, free the entrepreneur, establish free trade, eliminate the Federal Reserve, and return to the gold standard. The economy would recover before Congress could finish reciting those 28 words....

I'm not predicting the market will crash this week and I don't even completely discount a very strong bear-market rally, given that the market has lost 45% from its high in 2007. What I am saying is that markets don't normally crash and they only crash under certain conditions. Big government reforms, bailouts, stimulus, and "change" in general create negative expectations of the future along with a great deal of uncertainty. This leads to inaction and fear — the preconditions for a crash in the stock market. All it needs now is the appropriate trigger.

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My thoughts: We could be witnessing the shortest period of recovery/prosperity in the post WWII period. The leading indicators are points to an official end to the recession about May 2009. However, the tinkering with the economy will continue until at least 2011, creating uncertainty and malinvestments that will make the current downturn look minor.

Mark Thornton Answers a Journalists Questions

1) In which way do the central banks contribute to the problems we see now?

The central bank created the problem in the first place...

2) Can or should the government or central banks do anything to prevent a collapse of the banking system, at this point? Why not?

No...

3) What will be the consequences of the continued attempts by the authorities to prevent more bank failures and the seizing up of the credit markets?

Bailout policies are what turn normal recessions into depressions...

4) Is a world without central banks possible or desirable? Please explain.

Central banks are unnecessary and harmful...

source and more detailed answers

Housing Bubble Explained

Mark Thornton on the Housing Bubble

1. The Federal Reserve cut interest rates to as low as 1% so that after inflation we had negative interest rates.

2. As a result, mortgage rates fell to an all time low.

3. Low rates caused borrowing and lending to explode, particularly in real estate. For example, commercial banks more than doubled the amount of real-estate loans they made.

4. All these low interest loans had to be extended to people with worse credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed.

click for the graphs