An economically sound, morally just and free fix to the subprime crisis

While the subprime crisis should have best been avoided than solved, there is a simple way which could have solved it.

All the efforts of the government, no matter how you look at it, were targeted at pumping money into the financial system to inflate prices. Not only is this approach unsustainable - it tends to produce other similar crisis - it is also morally dubious.

Yet, I contend that there is a moral, simple, fast, effective, free, and economically sound way which would have solved the crisis.

Overall, the economic damage was the construction of too many houses. The fact that people with bad credit got to have mortgage is not a cost in itself. Instead of increasing the supply of money to match the supply of houses, it would have been far better to increase the demand for houses.

At the beginning of the crisis, in August 2007, the US government should have simply auctioned 20,000,000 green cards, and use the proceeds to fund the tax stimulus. Problem solved. Not only would this have stopped the crisis, it would have erased the cost... the error of building too many houses would have become, by chance, the correct economical choice for the increased demand.

It's a bit of a one shot, and doesn't address the systemic problems that lead to the crisis, but it's certainly much better than trillion of dollars of bailouts.

Why doing this is politically infeasible while using trillion of tax payer money is, frankly is beyond my comprehension.

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I'm with you

I've said largely the same thing

So how about this for an 'emergency' measure to help the economy: Issue 1 million extra visas this year. I'm partial to Arnold Kling's visa auction proposal, but it could be done other ways. But if the U.S. could sell 1 million visas for $20,000 each (has anyone ever tried to estimate the market value of a U.S. work visa before?), we have a lot more play money for emergency 'bailouts' and the like, not to mention the housing effects.

Of course, my numbers are laughably low, especially now . . .

There's a good possibility

There's a good possibility that I stole it from you then... but since I didn't remember your message when I wrote this entry, it makes it creative instead of plagiarism ^^

Instead of channeling the

Instead of channeling the money through the government by auctioning the visas, why not just require the immigrants to provide proof of home ownership within, say, 90 days of entering the US?

For bonus points, require that they buy a house in Detroit.

"20,000,000 green cards "

"20,000,000 green cards " ?
And what exectly are these twenty million new residents going to do for a living ?

Caill, Whatever they happen

Caill,

Whatever they happen to be good at doing, and whatever compensates them for the cost of travel and relocation, as well as the cost of the auction itself. Otherwise, if there were no jobs for the new residents, why would they bother purchasing auctioned green cards and paying the cost of traveling to the U.S.?

I think when you add those

I think when you add those up it goes negative. Mexicans are immigrating out of the country. The market has spoken.

I betcha, if they were forced to pay for their health care, use of the roads, etc. even more would leave.

There's infinite demand for

There's infinite demand for labor. Since immigration will dilute capital to labor ratio, wages will go down, fortunately prices will go down even more.

Real Wages Do Not Neccesarily Increase with Larger Labor Pools

"There's infinite demand for labor."

What do you mean by this.

If I have a capital good, say a shovel, then my demand for labor (with regard to the capital good) is restricted to one man hour per hour.

"Since immigration will dilute capital to labor ratio, wages will go down,"

Yes, all other things being equal.

"... fortunately prices will go down even more."

That is not necessarily true. This can only occur if natural resources can be extracted at an increasing rate with more labor, above the increase in labor, for all resources, all other things being equal.

Greater use of natural resources (or faster extraction rates) mean that you have to move to more and more marginal resources. It's pretty clear that you cannot do this forever. Even short term there is a limit to how fast. I'm including farming as a means of extracting natural resources.

There are plenty of agricultural communities where increased population levels have lead to lower real wages. Lower real wages caused by wages falling faster than prices.

It's obvious that their isn't "infinite" demand for labor because the earth does not have an infinite carrying capacity for humans.

If it were true that there were an infinite demand for labor then there would be no need for people to migrate. In fact, according to your "law" that prices will fall faster than wages these overcrowded countries of origin should, according to the law, already have higher real wages. After all pumping out babies like rabbits, according to your theory, lowers prices faster than wages.

Likewise if resources were not a limiting factor and it was all about the quantity of labor driving up real wages, we'd all be best served to move together into the smallest country possible.

Apparently total quantity of starting capital doesn't matter either since you didn't mention it. Thus we should start with as small a country as possible that already has a high capital to labor ratio. Someplace like Monaco with high real wages. Then according to your theory each additional laborer added will lower the capital wage ratio, but lower prices, and increase real wages.

So let's go. All 6 billion of us.

Not a good idea even if transportation costs are zero for us and all our capital.