Tuesday, November 18, 2008

No Confidence in Mr. Paulson

If Henry Paulson's intention is to reassure the American people by publishing an editorial in the NYTimes today, he is not doing a very good job of it:

I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress. And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.

A troubled-asset purchase program, to be effective, would require a huge commitment of money. In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn’t enough firepower.
Pretty Lady is, of course, not an economist. But even she can see clearly that if the American economy is based solely upon real estate prices, the American economy is very ill indeed.

She once heard that the Rule of Thumb for housing is that a financially responsible person spends between ten and twenty-five percent of her income on rent or mortgage payments. This formula, she understands, ensures that a person has enough left over for groceries, transportation, health insurance, savings, clothing, education, entertainment, vacations, and other incidental expenses of life.

She thinks of this formula every now and then, and a thin, bitter smile flits across her face.

For the only time that Pretty Lady's income/housing expense ratio met this standard was...well, Pretty Lady's income/housing expense ratio has never met this standard, even when she was living in Mexico, because when she lived in Mexico she had virtually no income at all. The fact is, if Pretty Lady told you her average lifetime income/housing expense ratio, you would all stone her. You would cease to take her admonishments seriously ever again, because obviously such a fiscally irresponsible human being is not fit to be living indoors at all, let alone dispensing advice.

But the fact is, in the metropolitan areas where Pretty Lady has lived for the last twenty years, it is virtually impossible for a person who is not an investment banker to adhere to this formula, for the simple reason that wage/real estate price ratios are overwhelmingly real-estate heavy. Real estate, in short, is overinflated as though it were the basis of an economy wherein people are making far more money from real estate speculation than from actual work.

This is not, and never has been, a healthy or sustainable state of affairs.

In Pretty Lady's non-economist view, it is about time that real estate prices came down. Real estate prices are killing her, as well as nearly every other person she knows who works an actual, physical, productive job. If someone's gambling income collapses because he bet that real estate prices would continue to skyrocket forever and ever amen, and leveraged those bets at a ratio of thirty to one, that person should by rights be stripped of all his assets and given a job repairing pot holes, by hand, with a shovel and a wheelbarrow full of concrete. He may start either on Canal Street, or that section of the FDR which nearly took out her suspension yesterday evening.

Injecting hundreds of billions of dollars into the financial system with the goal of keeping real-estate prices inflated, however, strikes her as the worst sort of stupidity, if not downright malignant robbery. Provide credit to productive businesses, certainly. Extend unemployment insurance for honest workers who are out of a job; provide healthcare, education, and investment in green energy. Fertilize the roots of our economy wherever there is something actually growing. But for God's sake, quit pumping the real estate balloon. Are you mad, Mr. Paulson? Are you a fool? Or are you simply evil???


Chris Rywalt said...

How about just greedy? Everyone wants something for nothing, right? And where can you get something for nothing better than real estate, which goes up in value for no reason at all?

George Pal said...

No, I think evil. There is much too long a line of Goldman Sachs honchos popping up in one administration after another. It would surprise me if Paulson's allegiances were to any but his own brotherhood.

Chris Rywalt said...

I suppose an argument could be made that greed is evil.

Pretty Lady said...

One of the most staunch ultra right-wing Southern conservatives I know thinks that the Paulson plan is actually, literally, overtly evil. There are no controls on the money, and it is being funnelled directly into the pockets of the people who created this mess, with no accountability.

Chris Rywalt said...

See, that doesn't sound evil. That sounds greedy. Paulson funnels money to his friends, they give him a high-paying job when he leaves public service, he recommends a successor who also knows how to play ball, everyone wins.

Except us. But that's nothing new. The good thing these days, to me, is that Americans have enough surplus to feed themselves (a bit too much in some cases) and keep roofs over their heads and still throw enormous sums of money away on taxes to fund bailouts and whatnot. That's pretty incredible. Back in the Middle Ages a tax rate like we have now would've lasted about eight seconds before the landowner got lynched.

I mean, I consider myself to be struggling financially, but I'm in no danger of going hungry or being homeless. My car sucks, I don't always have underwear, a lot of my shirts have holes in them, and I can't afford panels to paint on, but I'm well-fed (again, a bit too well-fed), well-medicated, and I have a nice mattress. The collapse of the economy isn't so bad, really.

George Pal said...

Greed is when you keep doubling your bet. You'll eventually lose and go home sadder and wiser (maybe). Evil is when you play with loaded dice.

Chris Rywalt said...

I've been thinking about this and I think what you don't realize, George, is that they're not playing a game. They're playing a meta-game, a game of games. Part of the meta-game is changing the games you're playing in, changing the rules as you go along. They're not gambling with loaded dice; they're changing the rules that say loaded dice aren't allowed so that they are. That's not evil unless you're constrained by the rules of the game and can't play the meta-game; and of course you can, if you want. Most people don't think like that, though.