Signaled by rising prices, the housing industry ramped up production to meet consumers demand, funded by rising home equity values and fueled by cheap bank credit—instigated by the Federal Reserve.
It didn’t matter that the demand was not derived from consumers rising incomes, the industry followed the signal just the same. Once the same Federal Reserve tightens the money spigot, all the activities that sprung on the back of the boom is halted. This is what we are experiencing now.
Price aligns production with consumption in the free market. So that a rising price attracts capital to meet the demand. Manipulating the price of money (interest rates) instead of letting the supply of loanable funds dictate the price distorts the production process—via the business loan market.
The illusion of prosperity lasts as long as the money spigot is open. The worlds central bankers are again poised to mess with the price signal, they call it liquifying the system.
