Kunst

Why the Housing Bill Won't Help the Housing Market

We often focus on the "mortgage problem". The other side of the coin is the "housing problem", major oversupply caused by several years of overbuilding, caused by too many people getting loans they couldn't afford. When renters became owners, the number of rental units didn't go down but the number of new homes sure went up.

Think of a tsunami. The ocean has a normal level. All of a sudden, that level rises 20 feet and wipes out the coastal zone. Is everything OK when the water recedes to its normal level? That's what's happened with the mortgage/housing problem. The damage was done during the bubble, when too many people bought overpriced houses they couldn't afford, or ballooned their mortgages to cash bubble equity out of their house. As we return to normal, many of those people drop out of ownership and it is harder for new owners to take their place. Prices got way too high and have to come down, leaving many homeowners underwater for years to come. Trillions of dollars of paper equity have disappeared, and they are not coming back.

The only good solution to this problem was to prevent it. That might have involved some intelligent regulation, the kind that Paulson is proposing now, much of which is a return to prudent banking practices that were normal until recently. That's like setting up a new tsunami warning system -- good for the next time, not much help now. Republican administrations philosophically dislike regulation. Remember how we were told financial institutions could manage themselves better than the government? Then this kind of carnage ensues and they look bewildered. How could this have happened?

The problem isn't the hangover, it was getting drunk in the first place.