> ## Content Index > Fetch the complete content index at: https://www.smdp.com/llms.txt > Use this file to discover other available public pages before exploring further. # A radical free-market remedy for recession - URL: https://www.smdp.com/a-radical-free-market-remedy-for-recession/ - Published: 2007-10-23T15:00:00.000Z - Updated: 2026-10-25T01:11:32.000Z - Author: Guest Author - Tags: Opinion, Santa Monica, #archive-import *By Fred Foldvary Guest Commentary* IN 1997, I WROTE AN ARTICLE TITLED “The Business Cycle”predicting a recession in 2008\. I could forecast the year because a real estate cycle has occurred in the United States since the early 1800s, with an average duration of 18 years. The last real estate recession was in 1990, so I stated that the next recession would most likely occur in 2008. In August 2005, real estate prices were rapidly rising, and I warned that the boom would end badly. “Don’t blame the market,” I said, since the boom and subsequent bust were caused by government interventions that had distorted the real estate and financial markets. I warned that home prices would plunge, there would be defaults and foreclosures, and the economy would fall into recession. Now, as I write in October 2007, real estate prices have, for the time being, peaked. Home prices are falling in much of the United States. Sales have plunged, and many borrowers have defaulted. Loose lending standards have promoted subprime mortgages for folks who can barely afford loans. When the adjustable interest rate rises, they default. Banks sell these risky mortgages in the secondary market, facilitated by government-sponsored enterprises popularly called Fannie Mae and Freddie Mac.Mortgages are packaged and sold to hedge funds and financial institutions worldwide. Defaults create uncertainty about the value of these securities, and the whole global financial system then totters. The Federal Reserve has come to the rescue with money expansion and interest rate cuts. This action has calmed the financial markets, and the stock market has recovered. However, this great expansion of money will come at a price: Higher inflation later. Interest rate manipulations temporarily treat the symptoms but do not eliminate the causes of the business cycle. There is nothing the Fed can do to prevent the next recession. The Fed has been blamed for lowering interest rates too much after 2001, but the problem is not just a misjudgment by Fed officials. The fundamental problem is that the optimal rate of interest cannot be known under a system of central planning. The interest rate plays a vital role in the economy. It equalizes savings and borrowing and, in doing so, allocates income into consumption and investment at the right amounts, so that all income gets spent. But when a central bank like the Fed manipulates the interest rate, it becomes different from the natural free-market rate, and it is then not allowed to do its job. That creates distortions, such as an unsustainable real estate boom. The real estate boom gets escalated by another government intervention: The tax system. To the extent that government works such as streets, public transit, security, parks, and schooling are beneficial, they increase real estate rentals and prices. That magnifies the boom as speculators jump in to buy properties to sell later at higher prices. In a libertarian world, with a pure free market, such security and infrastructure would be provided privately, and landowners would have to pay to get these services. When government provides such services by taxing mostly wages, sales, and business profits, landowners get an implicit subsidy, a redistribution of wealth from workers and tenants. Small business especially suffers from having to pay both high taxes and high rentals. The elimination of the business cycle would require radical changes in policy. The secondary market for mortgages would have to become privatized, with no government guarantees. The Federal Reserve system would be replaced by “free banking,”a pure free market in money and banking, with the money supply set by market demand, allowing the free-market interest rate to do its proper job. Finally, taxes on sales, wages, profits, and buildings would have to be abolished. Instead, private communities such as homeowner and business associations, land trusts, and proprietary communities such as shopping centers and industrial parks would pay for their civic services, eliminating the government subsidy to landowners. Without artificially low interest rates, mortgage and deposit guarantees, and subsidies to real estate ownership, there would be no real estate boom and no recessions. These radical free-market remedies will of course not take place soon, but at least people should understand why we have a boom-bust real estate cycle. Most important, they should understand that it is government, not the market, that will have caused the next painful recession. FRED E. FOLDVARY teaches economics at Santa Clara University. His main areas of research include public finance, public choice and the economics of real estate. *Originally published in the Santa Monica Daily Press print edition on October 23, 2007.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/102307.pdf?ref=smdp.com)