The Federal Reserve's surprising decision to keep QE going at its current rate is still front page news. While the US fiddles with monetary policy to meddle with house prices, the Australian government is set to interfere with banks in order to manipulate mortgage lending. If you've been reading the Daily Reckoning for a while, you know we are sceptical that government action like this produces the intended outcome.

The problem with the Australian housing market is a simple one. For prices to be at such absurd heights compared to the rest of the world (not to mention common sense), there must be a lack of supply and/or a surplus of demand. We've got both.

The central bank keeps interest rates low to spur demand and the government messes about with things like zoning laws to restrict building. If there was a free market in housing, each time house prices rose relative to everything else, more houses would be built and prices would return to affordable levels. As commodity traders in the Chicago trading pits will tell you, 'The cure for higher prices is higher prices.' In other words, let the free market do its work.

But the government can't have that. Housing is just too important, you can't trust the free market, or some other such nonsense. This type of thinking has been virulent ever since none other than Adam Smith admitted that we need the government to build things like lighthouses. After all, who would build lighthouses if the government didn't? There's just no way the free market can provide such goods and services.

Unfortunately for Mr Smith, about three quarters of lighthouses in the UK at the time he wrote were privately funded and built. Over in the US, they often point out that the private sector could never provide certain goods and services - air traffic control, for example. Sure enough, much of 'socialist' Europe runs on a private air traffic control system. The examples just go on.

So when it comes to housing, yes the free market could do it all darn well. If it were just left alone, that is. But that's not going to happen, is it? The good news is, the failures of government are prime opportunities for profiteering because governments fail in predictable ways. So let's take a look at the latest shenanigans the government has come up with to solve a problem it created.

The Australian Financial Review reports on the meddleomaniacs looking to hamper the free market's solutions:

'Former Reserve Bank of Australia board member Bob Gregory said a property bubble seemed "inevitable" and Melbourne University professor Ross Garnaut said making banks set aside extra capital would be "simple and logical".'

The other option being floated is New Zealand's supposed solution. Over there they limited Loan to Value Ratios, restricting how much you can borrow against a house.

All that's very nice. Good luck implementing it in a way that bankers can't get around. For example, bridging loans for a deposit are already common. And if lenders are willing to fudge their client's income and assetsto get past lending standards, a story which we have been documenting for months in the Daily Reckoning, they're willing to fudge the value of a house.

Here's our solution. Bring back Hammurabi's Code. The key part of the code goes a little something like this, 'If a house collapses, killing the owner, the house builder shall be put to death. If the first born son of the owner dies, the first born son of the builder shall be put to death.' More modern versions of the same rule include 'an eye for an eye', and the politically correct version is 'do unto others as you would have them do unto you'.

So what's the mortgage lending version of this? Well, at the very least, if a loan you made goes into default, you should have to return the fees and commissions you made. Can you imagine a world where people are held to account like this? Used car salesmen would be popular and politicians seen as nothing more than an inconvenience.

Bring back Hammurabi!

Regards,

Nick Hubble+
for The Daily Reckoning Australia