In America’s Housing Crisis: A Case of Government Failure Edited by Benjamin Powell and Randall Holcombe
Dr. Mark Thornton Senior Fellow Ludwig von Mises Institute 518 West Magnolia Avenue Auburn, AL 36832-4528 334-321-2146; fax 2119 mthornton@mises.org * Comments are welcomed. Please do not quote without permission. *
The author would like to thank Robert Blumen, Kevin Duffy, Robert Ekelund, Mike Pollaro, Jeff Scot, Jeffrey Tucker, Doug Wakefield, Paul Wicks and the editors of the book for their commentary and assistance. All error remains my responsibility.
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The Economics of Housing Bubbles
Nothing better illustrates government failure and the housing crisis than the housing bubble. Government policies make homes increasingly expensive and beyond the economic reach of first-time home buyers. Then as interest rates rise and housing prices fall, many home buyers find themselves with bad investments that they can no longer afford. What started as a government effort to improve the prospects for home ownership through a policy of “easy money” ends up having unintended consequences that will leave many Americans economically scarred for the rest of their lives.2 When an economic bubble pops many people suffer economic harm. In the case of a housing bubble, this includes home owners, particularly new home owners who buy homes during the peak phase of the housing bubble. However, the harm also spreads to labor because of unemployment, and creates a loss of value to owners of capital, particularly in housing-related industries. At the individual level many people are forced into bankruptcy. On the macroeconomic level the bursting of the housing bubble can send the overall economy into recession or depression. Housing bubbles concentrate their impact in the home building, materials and furnishings, real estate sales, and mortgage businesses. On top of all that, people suffer psychological consequences
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