The latest column by Steve Forbes argues several points that I myself have raised.
There may be yet another villain at work: inflation. Many of us are familiar with John Maynard Keynes' quote, "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." True, prices are not rising in the fashion in which they rose in the 1970s and early 1980s. But the inflation the Fed mistakenly fired up three years ago has certainly distorted the economy, thereby unnecessarily stirring up anxieties.
Amen. Inflation is a process, it is destructive, it is often hidden, and in this case it is Fed induced. Forbes also shows how the impact of inflation is often misunderstood. He focuses on housing.
Housing construction was crackling before 2004 because of Congress' virtual elimination of the capital gains tax on primary residences in 1997. But the Fed-fed inflation fired up the housing boom to white-hot levels. Flush with cash, lenders lowered loan standards, and new players entered the mortgage market. Fraud blossomed--why examine too closely a borrower's 1040 when rising prices will bail you out if the borrower gets in trouble? Speculators paid people to file mortgage applications to buy houses and apartments and quickly flip them. Now the sale price of houses is falling in many parts of the country. To add insult to injury, property taxes continue to climb as assessments catch up with housing values.
His explanation for the housing boom fits our thesis, as does the havoc caused by the Fed's inflation. We cannot deny the fraud and other problems in the housing market today but we see them, as Forbes does, as the misguided attempts of market participants to respond to the Fed's inflation. We also see these negatives as much less important that the fiscal incentive that launched the boom.