Bluematter.

This must be the most rambling and disjointed post that has ever appeared on Bluematter.; the reader would be well advised to scroll further down.

It is a fact that, at least ignoring second-order effects, the whole house market crash/ subprime crisis thing will have no long run effects on output. Concerns about the distribution of wealth apart (the current mess will lead to a massive redistibution from home-owners and loan issuers to the rest of society), there is no effect on anything other than how we value a single good: the land and the houses are still there and they are exactly the same as before; the only thing that is in fact different is that a house now buys fewer tomatoes than it used to.

In other words, there is nothing special about a house market crash or correction; it's just a change in the relative prices of different goods in the economy. In fact, to the extent that land is a capital good, society as a whole is better off: think how much better off we would all be if oil was free (ignoring pollution). If Saudi Arabia gets screwed in the process, we can always compensate them so that the advent of 'free oil' consitutes a pareto improvement.

Many economists reading this will argue that this is all well known; the long run is not the issue at all here and the reason everyone is so worried is the short run and the probability this will push us into a recession.

Now think of our approach to free trade and immigration. The parallels are striking: in the long-run, society is better off (again, ignoring the effects of redistibution), much as is the case with lower land prices. In the short-run, many people see part of their wealth (e.g. human capital) dramatically change in relative price terms. The only difference between freeing up trade and letting the housing market go to bust taking the homeowners with it is speed and numbers. The dismantling of barriers to trade or immigration has never been so rapid or universal so as to allow that many people to get screwed at the same time so that a recession ensues. (at least not at the national level; you can always look at the dying cities of Detroit or Buffalo in the States, the great industrial and mining towns of the UK and most farming towns in the Continent).

Economists are generally gung-ho when it comes to liberalising trade, while they tend to express concerns when they see falling asset prices. The difference between the two, however, does not amount to much other than the *natural* speed at which each occurs. I'm all for both, but the different approach has to be seen as a comment on the desirability of shock therapy when it comes to economic policy.