[william.hardwick]

I remember reading in Prices and Production (by Hayek) that the capital structure is lengthened when the interest rate is held below the natural rate, and the natural rate tends towards the rate of profit. It seems to me that the industries that will have their capital structure most over-expanded during a boom are the industries with the highest rates of profit. Due to housing policy and lower lending standards, my assumption is that this was the case with the housing industry.

What I’m trying to better understand is, why were people like Peter Schiff able to predict the crash based mostly on developments in the housing market.

[william.hardwick]

I think I am understanding what you are saying, but I can’t seem to put it into context with the housing bubble and financial crisis.

In your opinion, what was the primary driver behind the financial crisis and how did it relate to the housing bubble? From my interpretation of what you are saying, it seems that the entire economy was distorted by the low interest rates as the capital structure was lengthened in many industries where it was not sustainable, but that doesn’t explain why housing was such a big part of the overall picture.

[william.hardwick]

So, let me see if I understand this correctly in the case of the housing bubble. Because of the low interest rates and irresponsible housing policy, more houses could be purchased than otherwise would have been the case absent government interference. This, in turn, resulted in more producer loans in the industry, since the increased availability of consumer loans was signaling to lenders that it was a profitable market. But, the distortions in the capital structure only came about as a result of the producer loans, and the consumer loans were simply a catalyst.

[Author]

Posts