Irish property prices "floating on air" ?

UCD_Econ wrote: »

The causes of this credit crunch have never occurred before, they are new(ish) financial instruments and short-term, short-sightedness on the part of those actors you referred. Each was acting in his/her own self interest and, obviously, there was market failure of mega proportions. That's an ill conceived incentive structure on the part of the financial institutions that caused systematic failure--you can't measure that specifically. It's an unknown unknown, so to speak.

On one level there were new elements, the ratings agencies etc. but at a deeper level, there was nothing new that wasnt known and hasnt been written about for years, the effect of Asian trade surplusus on the debt markets, the increasing level of debt required to generate an extra dollar of GDP, housing bubbles are well documented in history. Financially I have been preparing for this since 2004, all I had to do then was tick off the steps as we went along, at the same time seeing it unfold is jaw dropping.

BenjAii wrote: »

I'm assuming you are suggesting that if it were up to the market to act without interference it would be a perfect mechanism for matching risk to available funds ?

Thus, in this scenario, asset bubbles would not happen becuase market participants would be too rational to let this happen, and would increase the price of money that wanted to invest in already over-priced assets.

But all evidence seems to the contrary. In fact market participants have shown themselves time & time again to be irrational, frequently unbelievably stupidly so. I don't think we can let them off the hook if they give us the excuse, "well if the government hadn't given us all that cheap money ......"

After all in your theory these are the people who are supposed to act to create the perfect market without any government.

human nature does come into this , free market or not there will always be some hot idea that casues an asset price to rise which will create leverage etc, at the top of the boom crazy assumptions will come into play........
The only issue I see here is how much did the gov interfer during the bubble eg bailing out LTCM in 1998 and how do they try to pump money into the system after a bubble bursts.
The major flaws I see are that gov. created inflation and negative real interest rates distort the natural flow of capital & savings in the system. A free market system would not allow decades to pass where real interest rates were negetive, the fact that they have been is part of the mix of why we are at this point now.

BenjAii wrote: »

I agree with you that governmental bodies frequently fail as regulators of the market, but market participants left to their own devices seem to do just as badly.

In which case, we are still left with a need for regulation by somebody.

As this regulation would have to have the force of law (self-regulation being open to manipulation by market participants), is it not the case we need better regulation by government ?

You are saying that over supply of money and too easy credit are at the root at the current problems, but somebody has to decide these. Are you saying the market has in-built self-regulating mechanism to do this that would be better than governmental bodies ?

have a read of the following article it expresses my concerns of where the current system is going

http://mises.org/story/3195

End the Central Bank
Daily Article by Llewellyn H. Rockwell, Jr. | Posted on 11/10/2008


extract

Money is a commodity like any other commodity. It should be produced and managed under competitive market conditions, the same as shoes, eggs, or computers. Banking too is a market service that should be managed by the market order, with no government involvement, and so subjected to the discipline of market forces, including the restrictions against fraud.

Establishing a market system of money and banking requires nothing other than having the government step entirely away. This might seem unlikely, but so did the unraveling of the Soviet Union in 1989. Socialist ideology was bankrupt in the same way that Russia was bankrupt. So it is in our time. Major players in the banking system are bankrupt in the same way that stabilization policy is intellectually bankrupt. We cannot rule out the impact of intellectual bankruptcy on real economic history.

There is a certain poetic justice that alarm at the central bank would be the driving force behind the new interest in the Austrian school. Austrian economics was born with Carl Menger's reflections and innovations on the nature and function of money. It matured under Mises's own contributions and warnings about the dangers of central banking. Hayek joined Mises in the 1920s and 1930s to focus on the business cycle and the dangers of using the money and banking system as a stabilization tool. This led to further reflections on macroeconomic principles.

Mises and Hayek lived in a world that had fallen for Keynesianism, so their advice was rejected on grounds that it was outmoded. Today, that belief is gone and people are looking for new answers.

It is time that the world return to the one school of economic thought that predicted this current crisis, explains its origins and source, and offers the only plausible way out. It doesn't matter that some of their writings date back more than 100 years, or, in the case of our predecessors, even up to 800 years. Economic science teaches timeless truths. Sound money is an immutable need always and everywhere.

BenjAii wrote: »

You blame this on the government for supplying them with easy money.

But that is logically inconsistent with your argument that they would create a perfect market if left alone.

Correct me if I'm wrong but you are making the assumption that most market participants will en mass make illogical decisions some/most of the time regardless of the system they operate in therefore there is a need for central economic planning and regulation.

I'd argue that the current system sends out false signals to the market thus confusing market participants into making wrong decisions in how to allocate capital. Take inflation for example, this ecourages yield chasing and speculation and thus creates a misallocation of capital. Also take for example a small businees owner, say due to central bank money printing he begins to see business increase, so he says to himself I need to expand, so be borrows or commits capital to increasing output. As far as he is concerned he has made a rational decision however he is not in a position to know that either the currency is being debased or that his receipts are are being derived from an unsustainable credit boom, Harvey Norman springs to mind as an Irish example where a retailer as expanded in the tail end of a credit bubble and is now suffering.

The current gov solutions seem to be trying to give the drunk more alcholol, so I cant see that gov. regulation in total will solve any problems longer terms, it will just revolve around a redistribution of wealth to favoured groups or increased activity of the gov. which will reduce savings available for investment

From my point of view I'm not worried if "Austrian" economics ever sees the light of day, I find it a useful prism to judge the current solutions and all I can do is laugh as the so called heavy hitters like Paulson

BenjAii wrote: »

You got the first part right; I can't see how the Austrian model is right in saying market participants left to their own devices will always create an optimally functioning market, when it's obvious they don't at present, so its hard to understand how removing government regulation as one of many variables they contend with would magically make this happen

I gave you a reasons why market participants are not making rational economic decisions under the current system, you cant respond with
"it's obvious they don't at present" I know they arent at present

Otherwise it sounds very philisphically patronising to say that the general public or industry cant be trusted and must be micro managed. I'd argue that that people should be allowed to suceed or fail, if there are no consequences to making bad decisions then I would worry about that society

BenjAii wrote: »

I don't mean to come across as patronising, it wasn't my intention; nor was I suggesting micro-management or central economic planning.

I'm merely pointing out, that in the case of the financial markets, the Austrians schools theories rest on the idea that financial markets would operate optimally and in the best interests of everybody if they were free of any government involvement, including that of government bodies controlling money supply and interest rates.

Yet they give no explanation of how this theory would work. Especially in the light of the very large amount of evidence to the contrary.

I am merely asking to see some proof for their assertions ( there seems to be none ? I keep asking for it), and am not making any sort of case for how or what government actions and regulations should be.

Try this, Mish put together an interesting piece where he takes a different stance from Roubini on the argument for more regulation, he goes into specifics so if you want to highlight a section you dont agree with or think he is just knocking the present situation and not offering an alternative highlight it.

http://globaleconomicanalysis.blogspot.com/2008/09/roubini-misses-boat-on-regulation.html


Otherwise in general all I can say is that there are plenty of models for self regulation that work and have worked in history for instance in Britain and the US in the 19thC many commerial groups had their own codes of conduct/courts etc. where contracts could be enforced without reference to state courts or judicial enforcement.