Sunday, August 10, 2008

NYC is NOT Going Broke !


The Economist magazine, of which there are at least one million subscribers (good for them! Workers wishes it was 100 million), has a piece on how the fiscal situation of the city is going downhill because the bank and finance house profits are way down and thus so are taxes. This situation is predictable.

In the Austrian School theory of the business cycle certain booms are unsustainable due to bad policy, this then causes a bust which is worse than had the bad policy not been in place. Although the most common bad policy the Austrian School people use is central bank manipulation of the interest rate, in this case, we have both the interest rate manipulation AND other policies which caused the financial bubble and now the inevitable downswing.

The Fed has been opening its discount window to finance houses in addition to banks, and as we all know, along with the Treasury Department the Fed brokered a deal to keep Bear Stearns from its inevitable end. Also, it is well known that Fannie Mae and Freddie Mac (government institutions both) support lending in the housing market, with increased home ownership (and thus implicit subsidies, including interest rate tax write-offs to those that finance housing) being official government policy. The combination of all these things has meant that more money was being invested in housing than would have been had government policies not distorted the economy.

These distortions then lead to a bubble, which was unsustainable. Because bad investment needs to work itself out (investments are 'sticky', you can't just move most money from one place to another like switching television channels or songs on your MP3 player) the economy underperforms during this workout period. That is what is going on now.

Yes, this is going to hurt the City of New York in the short term. But change is part of the human condition, we have and will continue to survive and prosper and will find more productive, useful, and sustainable things to do with our time and money after the shake-out. This is of course assuming that government policy doesn't prevent the shakeout (like it did in the 1930s prolonging the Great Depression).