There is some good news. I’ve seen figures that say that the property market in China is stabilizing. Prices are still going down, but lots of people are snapping up cheap deals in real estate, and so the volume of real estate sales is actually going up.
I think the huge savings is going to be very helpful for China to recover, since if you have lots of money in the sidelines, the markets don’t collapse when there is a massive price drop. You see a super-cheap house or super-cheap stock. The buyer has cash. The seller has cash. The buyer and seller both shake hands. The buyer gets a really good deal. The seller takes a loss but has cash. This is the way that markets are *supposed* to work.
The problem right now in the United States, is that this won’t happen if the buyer and seller both have large debts. You don’t have buyers with ready cash, and what cash they have, they want to keep. The sellers are also broke so they can’t sell and realize a loss.
An exercise for Austrian economists is to look at market microstructure. Austrians have developed a rather rigorous framework for going from the individual actions of buyers and sellers into social good. The basic idea is simple which is that the buyer and seller will only undertake exchanges that improve each others well-being, and therefore a system based on market exchanges will naturally deal to an improvement in social well-being.
What I think Austrians should do is to look at situations where this breaks down. If you have a situation in which “bad things are happening” then it must mean that this rigourous logic has broken down somewhere, and the nice thing about rigourous logic is that when it breaks, you can list the places where it is broken.
So you have situations in which:
1) invididual exchanges benefit the people making them but don’t result in social benefit, perhaps because there is a third party that is not part of the transaction that is being harmed. A very good example of this is the whole subprime mortgage issuance system. You have a mortgage broker that makes money from commission when a deal is signed, and a borrower that gets a lot of immediate cash.
2) individual exchanges which *would* benefit the people making them don’t happen. This can be because neither has the cash.
One thing that comes out of this is that corporate structures are very important. Many economic transactions include merely a buyer and a seller, but most economic transactions involve agents and the buyer and seller may be abstract entities. Also, it’s important to look at this carefully because I think it is obvious now that some of the things that were suggested to align the interests of the “principal” and the “agent” did no such thing. Stock options and bonus system for example. The problem with stock options and the bonus system is that you make a ton of money when the company makes a ton of money, but you lose the same amount if the company loses a small amount of money or $1 trillion dollars. So the logical thing to do is to assume huge amounts of borrowing and risk so that when the company makes money, it gets magnified, but if the company loses a ton of money and threatens to destroy the world financial system, you just get fired.
In any case, I think thinking in terms of market failure at the level of individuals is another way of looking at the problem, and it’s something that I think Austrians and Chicago Schoolers can do usefully if they want to keep the evil socialist, big government, serfdom promoting Keynesians from totally dominating the economic conversation.