I wasn’t being prescriptive (what we should do), just descriptive (we tax payers were already on the hook, one way or another).
Yes, house prices are going to find their level eventually. At some point where supply (built and new construction) crosses demand (number of households and what those households can actually afford, not just get a loan for).
There are a couple things we could do. Again, I’m not being prescriptive yet, just descriptive.
1) We can accept the tenants of macro economics that each entity in an economy has an effect on the other. We could have allowed the unsound, stupidly loose lending to be replaced by sound lending, which would have put demand WAY, WAY below historic norm demand since we’ve been increasing househod debt at 3x the sustainable rate for 30 years. The near total lack of demand would have caused prices to not only return to historic normal price of 3x median income, but in fact, because so few have good credit and 20% down, would have caused a way over correction.
Massive overcorrection would have magnified the number of foreclosures, and the loss on each.
Easy to say that most mortgages are securitized, but the Fed disagrees.
http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm
2007, $14T total mortgage debt. $5T was on banks, $1T on the gov, and $7.5T pooled. Of the pooled, $4T was on the GSE’s.
As WT Economist points, a huge chunk of that GSE securitized was on the banks rally.
The entire US banking system had some $575B tier1 and tier 3 capital that could be used to cover losses. So, of the $11T mortgage debt, if they were exposed to $5T directly and say $3T of the $7T pooled, then a 10% loss wipes out the banks. A 50% loss wipes out the banks and puts $3T+ on the USA taxpayer via FDIC.
Meanwhile, the loss of the banking sector, then loss of all businesses dependent on banking for rolling over debt, households that have been rolling over debt, and a host of other bankruptcies…
I’m sorry, but in that scenario, we’re in depression.
In depression, mass losses of jobs further reduces demand. The price of a house falls to that of whatever barter currency replaces the now defunct dollar.
Another option other than straight down is the delay and pray we are using. Under this scenario, we totally ignore the underlying structural problems that have made us dependent on unsustainable debt growth, and just have the federal government step up with the $1.5T a year new money/debt creation that our trade imbalance plagued economy requires.. At best, we can do this for a decade or so, until it becomes painfully obvious to all that the deficits are not short-term, and that the delay and pray is ultimately doomed to hyperinflation or the same debt collapse of the previous scenario.
Personally, I’m neither a fan of “let it crash” nor a fan of “delay and pray”.
I’m a HUGE fan of a DEEP examination of the underlying structural issues with our economy, where we find that in the modern economy, money is borrowed into existence and is offset by debt, and for 30 years we’ve been funding massive trade imbalances through unsustainable debt growth, and that the ONLY way to stop relying on that unsustainable debt growth is to attack and reverse the underlying imbalances that created the need for the unsustainable debt growth in the first place.
However, there is little chance of that, since we can’t even get past the first step of acknowledging what is money in the modern economy.
But, I’m not allowed to talk about that, even in the context of how the US Government was already on the hook for the loss, via FDIC, even before we stepped up with the banking system bailout.
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