Considering New York City, it’s no reach to suggest that apartment rents are one of the biggest concerns for voters there. That’s no insight. The world’s most talented annually find their way to NYC, but NYC itself can’t geographically expand in order to meet the relentless needs of an acquisitive citizenry. The result is now, and has long been, soaring rents.
No doubt NYC mayors past and present wish something could be done to reduce apartment rents, and certainly government officials have tried. Think rent controls. Except that they logically didn’t work. Which is similarly not an insight. High prices are a summons to production of more of the desired good, in which case rent controls lower the cost of the desired good by decree.
The obvious problem is that markets always speak their mind, and without regard to the utopian views of hopelessly confused politicians. At best, price controls meant to artificially reduce prices result in less supply, and higher prices as a consequence. Markets will bend to no one. Much as NYC’s mayors might wish otherwise, no regulatory body can save them or power them to re-election via policy meant to decree rent cheaper than the markets will allow.
It’s something to think about as the inevitable opinion pieces about the Fed proliferate. Will it lift President Biden to re-election via “lower interest rates,” or will the Fed remain “tight” such that Donald Trump, Nikki Haley, or name your Republican gains advantage heading into November. These columns aren’t serious.
Economist Mickey Levy wrote just this kind of column recently. He made a case that the Fed “won’t try to boost Biden.” Ok, but such a view implies that the Fed could, by intervening in credit markets, boost the incumbent. Such a view really isn’t serious.
With New York City we’re talking about apartment rents, but with the Fed the implied assertion from Levy is that it can shrink the cost of borrowing for all resources in the economy. No, there’s no way.
The Fed, like the government that created it, has no resources. And when economic actors go into the market to borrow “money,” they’re not borrowing money. They’re borrowing what money can be exchanged for. It’s just a reminder that as opposed to something governments or central banks give out, credit is produced. In the private economy. Nowhere else.
Levy’s analysis presumes that the Fed, if it wanted to, could lower the cost of accessing global resources by decree. Except that it can’t. The markets don’t cease speaking the truth just because the Fed is the lying entity.
Assuming the Fed could do as Levy and other economists believe, as in decree credit artificially cheap, the logical extension of such an intervention would be even less credit. In other words, if the Fed’s power resembled what Levy imagines, lower interest rates meant to help the incumbent would result in scarcity. Remember, high market prices are a summons for production, while artificially low market prices are a production deterrent.
It’s something to think about as the inevitable awaits us. With the Fed having already intervened in 2022 with 525 basis points worth of hikes that rallying equity markets throughout much of 2022 largely shrugged off, there will be talk of whether the Fed will start cutting. It’s utterly meaningless, the equivalent of presuming that west Baltimore could be made prosperous if the Fed would just gun so-called “money supply” there care of low rates to wake up a perpetually depressed economy. Not, not really. Money and credit are a consequence of economic growth, not an instigator. Central bank attempts to “boost” west Baltimore would be reversed within minutes by profit-motivated market actors.
At which point readers need only extrapolate the realities of west Baltimore to the U.S. economy more broadly. The Fed can’t alter a good or bad reality. Only economic activity can alter it. If the economy is growing, President Biden will presumably benefit at the ballot box. If not, he’ll suffer. Just know that the Fed can’t change this despite what economists are about to start telling you in 2024.
Republished from RealClear Markets