Hate to break it to Scott Shane, but in reality, he has no understanding of economics. This only proves the point:
Why Businesses aren’t hiring
“In the recoveries from the previous two recessions, small businesses led job creation. This time, however, small businesses aren’t hiring. That about-face has left a lot of economic prognosticators scratching their heads.”
Yes, “a lot” are confused, but not all. Those whose scholarship is based on the Keynesian paradigm are perplexed, as well they should be. When you throw a rock in the air, it will always be pulled to the earth by gravity. (No, it does not “fall”. ) Every time, all the time, any where you try.
So to do the laws of economics work the same. I won’t say Austrians understand the “truth”, as truth is always what one believes. Thus the earth at one time really was “flat”. Wrong factually, but true in the sense all believed. No, Austrians understand the principles of economics, and know full well that try as one might, you can’t make a rock float. (Reckless use of metaphors aside!)
I think the reason is clear. The collapse in home prices is holding back small-business hiring. And unless we fix the residential real estate mess, we won’t see small business hiring anytime soon.
The weak residential real estate market is keeping small businesses from hiring in five ways:
Egads, is he serious? Sadly, I have to assume he is.
Apparently he has no understanding of how the housing situation has happened. Please look into my archives or read a little more here. The housing bubble was just that, a bubble built on phony credit and malinvestment.
There is only one “fix” for the housing crisis, and that is for housing prices to fall, as far as, as fast as, the market determines. Anything else simply perpetuates, extends, and deepens the crisis. Or maybe Mr. Shane believes in breaking some more windows. That would of course mean artificially propping up the housing market.
Declining house prices have softened demand for small businesses’ products and services. The 29.5 percent drop in home values from the first quarter of 2006 until the end of the first quarter of 2010 has led to a huge drop in household wealth, which has led to reduced consumer spending.
Dear Lord. Housing prices ARE NOT wealth. Seriously, Mr. Shane, go to the bank and “withdraw” money from your house. Go ahead, try. You can’t. The reason should be obvious. It is not wealth. Your home’s price is simply a market evaluation at that moment in time were you to sell it.
As such, what he’s trying to say is that the recent so called growth was nothing more than a debt induced buying spree. Great.
Small businesses are overrepresented in the real estate-related industries that have been decimated by the residential housing market collapse.
All thoroughly explained by FA Hayek, among many others. It’s called the Boom-Bust cycle. This overrepresentation is called malinvestment. The only solution is to clear out the waste, let the market sort out what is valuable and what is worthless, and allow resources to flow into sectors that are desired.
Small business owners use their homes to obtain business credit.
This sir is the cause of the problem. The Fed (as is so well documented) pushed interest rates to historically low levels, which spurred a wave of easy credit, malinvestment, and overproduction in higher order goods. It’s what you get when you have runaway central banking and fractional reserve banking.
Banks have tightened lending standards in response to a rising share of non-performing real estate loans.
Too little, too late.
Small business owners were major customers of residential real estate loans during the boom, making them among the consumers hardest hit from the collapse in home prices.
Let’s try to clear this up as simply as possible for Mr. Shane and many others who see only through Keynesian colored glasses. First, you must understand the causal-realist approach to economics. You must recognize that this scenario you’ve painted is not the cause, but rather the effect. The cause was the easy credit from the which created the inflationary boom in housing, which fired up a long round of debt induced spending. The entire housing market sector is the effect. Its collapse is not the cause of anything.
Now, let’s clear up some more. The housing bubble was an artificial boom, where housing prices were artificially inflated by gross expansion of credit and the money supply. It was entirely fake. There was no real wealth (i.e. savings) to back it up. It was a charade, a sham, all smoke and mirrors. All the investment too that was funded by this credit frenzy was artificial. It created massive waste and diversion of resources, that pesky word I keep repeating, malinvestment.
What will keep unemployment high and the economy stagnant (stagnant being the best we can hope for really) is propping up the housing market. Anything done to return to this situation will only make matters much worse. Seriously, do we really need to start building houses again? Do we really need another round of debt funded consumption?
We need to let these wasted resources clear, as fast as possible. Let the housing market return to “normal”, where, you know, people actually buy houses they can afford with the purpose of living in them. It isn’t policy that forced people to do that, it’s policy that encouraged them to do otherwise.
It is this manner of thinking which keeps us from real recovery, real growth, and real prosperity.