Lately a day doesn't go by without some piece of bad economic news scaring investors. If it's not the rising price of keeping
The predictable response from both sides of the aisle in Washington is that they're doing everything they can to fix all three. But if we ignore the obvious problem with politicians seeking to fix what they broke, the too often unmentioned reality is that the political class has mistaken negative symptoms for the much greater weak dollar problem.
Considering
Their insolvency aside, Fannie and Freddie should be abolished for creating incentives among individuals to invest in housing at a rate that a free market would never countenance. An investment in housing is largely a "dead money" transaction, whereas when we buy stocks or mutual funds or put our money in banks so that it can be loaned out, we're supplying capital to entrepreneurs who will use it to grow existing and future businesses.
Still, to rant and rave about Fannie and Freddie is to miss what energized their core mission to begin with, which is to make housing more affordable. What made housing unaffordable in the '70s, along with the decade just passed, was the dollar's decline, which drove up the nominal cost of the commodities (including housing) that are least vulnerable to the currency's debasement. Fannie and Freddie are unconstitutional economic drains on their best day, but it was the falling dollar's often unsung role in the property boom that made them essential to a political class that worships at the altar of home ownership.
Considering bank lending, it is certainly tight despite a low Fed Funds rate. This isn't all bad in that during times of economic distress, lenders should necessarily be more circumspect in order to avoid destroying limited capital.
But not mentioned enough is how the falling dollar turns lending at low rates of interest into a form of gambling. Indeed, in offering up funds, banks must account for the opportunity cost of long-term loans along with the value of dollars that will be returned to them over time. And with the Obama Treasury doing a fair imitation of the Bush Treasury that preceded it in terms of encouraging currency weakness, it's hard for banks to loan out dollars of indeterminate value.
As for unemployment, all manner of proposals from the left and right center on "creating jobs." And while it's not the mission of businesses to create jobs, it must be remembered that jobs are solely the result of the willingness among individuals to save. Delayed consumption is what leads to capital formation, but with policy in Washington strongly in favor of a weakened currency, and with the Fed struggling mightily to keep interest rates artificially low, there's not much incentive to save at present.
To put it more plainly, there are no jobs without investment, but with the dollar merely the least weak among a world of weak currencies, there's little incentive for those with means to invest. Much as banks gamble in lending out dollars of indeterminate value, so is investing at present a gamble in that if one is lucky enough to achieve a positive return on investment, it's not a reach to assume that the greenback's debasement will eviscerate any nominal gain.
The answer to all of this is really quite simple, however. The dollar's decade-long decline vs. gold has reduced lending toward and investment in productive ideas, all the while making housing and other hard assets the defensive investments of choice.
In that case Treasury Secretary Geithner should announce that he favors a stronger dollar, and that Treasury will intervene in the currency markets to achieve a stronger greenback if investors don't do his work for him.
The result of such a move would be a reorientation of capital into productive parts of the economy, with job creation not far behind. Housing would be less attractive as an investment, thus reducing the presumed need for Fannie Mae and Freddie Mac altogether.
John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a senior economic advisor to Toreador Research and Trading. He writes a weekly column for Forbes.
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