Bigbuilder

Why Paulson and Bernanke's Plans Don't Work

I think much of this commentary misses the underlying fundamentals:

1. We have become too much of a consumer economy. The "investments" in housing were substantially a waste. How do media rooms and granite counter tops make us more productive in the long run competition with the rest of the world? That capital is sunk and cannot be redeployed unless we mandate that those receiving foreclosure relief pay us back by providing spare bedrooms to the homeless. Our entire policy of directing money into consumption is politically popular but grossly mistaken.

2. The government machine absorbs money and produces costly outputs that are at best a waste and at worst counter productive. Education has become a joke. Public schools are like insane houses run by the inmates. College grads cannot write a complete sentence. Lavish facilities and tenured professors do not assure that we will provide the next generation with necessary skills and mental toughness. The same is true of all government programs. BUT, in times of crisis, we run home to momma and plead for federal help. Help is then rationed by the political process to prop up the status quo, punish enemies and reward campaign supports. The only challenge is to manufacture a good cover story that convinces people that we have their interests at heart.

3. Human capacity for ignoring reality is boundless. We chatter about the issues of the day but ignore the long run fundamental errors because we cannot accept the truth: We have met the enemy and it is us. Nothing that is created in Washington can change the underlying reality of our current state. We have squandered our capital and must rebuild it by long and painful savings and sacrifice. Everyone must work harder and consume less. It is just that simple. BUT, the political and social divisions demand that we manage our own psychology so as to blame others and seek to extract retribution. This is a recipe for further failures. IF it gets bad enough, we will trade our freedoms for promises of material security.

Just How Terrible Is Housing as an Asset Class? Roubini Weighs In

The major points are correct:

1. Diminishing marginal utility. A family of 4 can live in 1,800 square feet OR in 3,600 square feet. They are NOT twice as well off in double the space.

2. Opportunity cost of capital. IF you live in 1,800 square feet and invest the difference ANYWHERE else, you will be richer in the long term. This is true for individuals and for the entire nation. We will miss the possible productivity increases that wiser investment would have created.

3. Over leveraged personal balance sheets are reflected, for a short time, in a strong consumer economy. BUT, leverage on the way down is a killer.

4. The nations under funded long term committments (e.g. social security and medicare) will "bust our chops" financially. Excessive debt at all levels AND capital tied up in media rooms and fancy kitchens will not pay for that.

5. Personally occupied housing is only an investment if you are exiting the housing game. When you die, your heirs will realize this "investment". Until then, you will merely shift the current value of your housing capital from one location to another, or from one form (i.e. owning) to another (i.e. renting).

6. The housing bubble will destroy neighborhoods and local governments and will inflict real costs (both dollars and quality of life destruction) far in excess of the "paper" loses on bad mortgages. The collateral consequence for national productivity and morale of the citizens is very negative.

Basically, there was no "free" market. Intervention by all levels of government to favor a specific behavior by consumers was done in order to create quick wealth for the campaign contributors of your elected officials. This mess will be an affliction for decades.

Preparing for the Fall

SWrichmond is right on regarding the insolvency of the financials. Add to that the insolvence of the entire US government due to unfunded entitlements and the only way out is repudiation or inflation.

In the process, there will be some of both. For example, how many $100,000 medical procedures do you think that Obama's recommended government health programs will be able to provide for those over 85 years old. It is harsh to say this, but reality is that the nation will untimately "sacrifice" the elderly by refusing the pay for state of the art medical care AND by inflating the economy as a hidden way of taxing all savers.

Add to the above the following:

1. Trade protectionism will destroy export markets.
2. International strife will strain our will and financial resources (e.g. North Korea, Iran, fundamental Islam, left wing dictators).
3. Global warming and other enviornmental issues will create political roadblocks to efficient economical responses to the various challenges.
4. Consumer debt, as measured by any historical metric, is grossly out of balance. This will mean years of substantial pull back.
5. Everyone, both private sector and public leaders, is primarily out for their own short term monetary gain. Each will engage in whatever lies or intellectually dishonest statements they believe will give them something today. The distrust of the people for both business and government cannot be overstated. Even well meaning, creative and honest proposals will be savaged for political reasons.

Finally, we are in for a ruthless competition with the rest of the world. We have had it too good for too long and we lack the willpower needed to handle the tough times. We will turn on each other before we will honestly determine that we need to change the nation in responses to the realities of the world. Just like the fundamental Islamists, we will be satisfied if we have someone to blame.

The above is the bright side.

Consider these possible future events: Nuclear terrorism; killer antibotic resistant bacteria; a return to ethnic and religious tribalism; global warming out of control; breakdown of worldwide financial systems and resulting riots over food and energy (already beginning). Bad enough for these to possibly happen...Worse yet, we simply cannot manage our minds and emotions to deal with either the RISK of any of them, or with the consequences of any of them.