The Price of Your House May Not Be Market Clearing
Source: Austrialian Financial Review
http://www.afr.com/f/free/blogs/christopher_joye/why_capitalism_is_not_doing_its_2jQRxPhxWW8HivdgmnOz4J
Contemporary capitalism is in jeopardy, and it’s because recent democracy have been rejecting the central idea of capitalism: creative destruction created by free functioning market, which is the main driver for productivity and economic growth.
The shocking news: the equities, bonds, and housing prices that we see today are not “true” market clearing prices. These prices, are in fact, fake and artificially inflated. These artificially inflated prices are a result of governments who are spending trillions of dollars buying assets in a misguided bid to maintain their values. That’s right; we’re all caught in the middle of governments playing in auctions. The last time that we saw such interference with global markets from the government was the global financial crisis.
Despite no evidence of a global financial crisis at this time, banks still continue to deny true market prices and instead impose false values by buying equities and commodities at false values. One resultant of this kind of toying with the economy is evident by the 2007 housing crisis, in which housing prices and values plummeted. That instance was a market signal that people and capital had become overexposed to financial services and were leveraged against assets, like housing.
The bottom line is this: by disabling markets from clearing naturally, we are essentially destroying the economic practice that has powered prosperity. In today’s world, Goldman Sachs, Morgan Stanley, and other big companies are worth more than they were before the Great Financial Crisis, so they wield a tremendous amount of power and luring investors into false markets.
In class we’ve seen idealized situations in which it is possible to find market clearing prices, and basically “everyone is happy”. But what do you do in the situation where market prices are artificial and fake, and the true value you once thought to be true was actually false? How does this change the practicality of market clearing prices in any given scenario?