Wednesday, October 08, 2008

Free market solutions to the credit crisis

The credit crisis has threatened severe economic hardship on the global economy. Many politicans have turned toward stepped up regulation and socialization of the credit markets in searching for a solution to this very serious problem. The failure of the financial system has been equated by both liberal and some conservative voices as an indictment against the free market. This is a dangerous consequence of policy failure and threatens the economy with a new round of growth-killing liberal economic policies. Indeed, the U.S. election campaign is replete with a range of vilifying statements about both financial institutions and borrowers. But these market participants are not the root cause of this crisis. Instead, it is the institutionalized failures of The Federal Reserve Board and its dual mandate and the failed immigration policies of the United States.

The Federal Reserve's hand prints are all over the mortgage crisis that has crippled the financial system. Clarifying voices that direct blame toward this institution are starting to be heard, although the tremendous regulatory roar for banker's blood is still far too defeaning. The(WSJ opinion piece - Judy Shelton: Loose money and the roots of the crisis) , is a recent example that clearly states the source of the credit crisis. Instead of vilifying market participants and regulators, Ms. Shelton directs blame on the compromising dual mandate of the Federal Reserve - its monetary fine-tuning of economic output at the expense of its core responsibility of protecting the value of the currency. Such an incompatible mandate is untenable over the long-term. Cheap money is the fertile soil of credit abuse. We should not be surprised that both financial institutions and borrowers abused a fiat money system that makes it so easy to lose sight of fiduciary responsibility and financial discipline.

In addition, the demand failure of the mortgage markets to continue to fuel ballooning asset prices can be linked to an immigration shortage. Demographics are the foundation of the housing market - policies that inhibit the natural labour flows of the economy handicap its proper functioning. Restrictive immigration policies are the prime culprit. Here the U.S. has failed itself immeasurably by institutionalizing the boom and bust cycle of this critical asset class. They have brought collapsing house prices upon themselves.

Today's WJJ opinion piece by Lee Ohanian - Good policies can save the economy reveals how pivotal immigration is to achieving a solution to the housing crisis. Instead of taxpayer bailouts - as both Republican and Democratic Presidential candidates have espoused - this housing crisis has a free market solution: immigration.

In this respect it is important that Americans understand the importance of the integration of North American labour markets. Without a new vision toward the North American economy the failures of the institutions that create crisis will lead to continued breakdowns of the market economy. It is time for North Americans to rethink the national boundaries of its member states and work toward a partnership that ensures prosperity and energy security in the face of a complex and challenging global economy.

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