David in D

More on Interdependence and This Crisis

Thanks for the follow up post. I have a question about scale for you and your readers. Let's suppose that the $700B loan to buy up sketchy mortgages does work and provides capital to keep lending practices moving forward and we fast forward one-year from now. In my assessment home prices in my neighborhood are running somewhere between 20-40% higher than they should be (and this is after already losing 20-30% from their 2005 highs) in realtion to real working-class earnings. With 20-40% additional "melt" in the market it seems that a sea of additional foreclosures will occur and the root problem (bad mortgages and other lending) will only compound even with this bailout. I just can't see how the $700B helps with the reality that too much money is lended on assets that simply aren't worth what is owed on them.

I'm no professional economist, but in this "best-case" scenerio wouldn't the only real solution be to actually encourage inflation to bump incomes upward 20-40% to make the existing paper loans affordable? I recognize that inflation also produces adverse effects in terms of savings being gobbled up, but it seems to me that the only sort of solution is an "adjustment" of asset prices as it is related to (particularly) working class earnings and I don't see how to do that outside of inflating our economy.

I am curious to hear your (and other's) thoughts on this.