If I've understood the logic behind this bailout correctly -- and almost certainly I haven't -- it is this: Banks and investors are holding bundled mortgages which have diminished in value as the real estate market has contracted.
This has presented a liquidity issue and tightened up the credit which oils the wheels of industry and whatever other forms of capitalism we have embraced.
The premise of this bailout, then, is that infusing $700-billion into the after-market for bundled mortgages will prop that market up, and that those bundled mortgages are now valued at an artificially low price because the market has gotten cold feet. And so by pushing all this money into the system, we're going to prop up the price of real estate, and when it goes back to its natural level all will be well.
If I have that right, please jump to a few conclusions (or at least further questions) with me. And if I don't have it right, by all means suggest a (market) correction. Or contagion. (Sorry, the coffee's working even if I'm not.)
The basic problem, I am guessing, is this: If real estate continues to reduce in value, all this paper reduces in value, and the problem simply gets worse.
But (almost) everybody agrees that real estate was over-valued, and that is, at least in part, what has driven this crisis. So part of the problem is sorting out what its actual value might be. The logic in Washington appears to be that the actual value of my home is somewhere between what it was a year ago and what it is now, and that our safety net is to be found at that balance point.
Several obvious problems lurk which should, at least in the near term, continue to drive home prices down.
(1) There are and will continue to be a ton of foreclosure on the marketplace. This drives the price down, and makes it difficult for builders to plan and erect new subdivisions. (Which is quite possibly a good thing, but we'll come to that.)
(2) The price of oil is inevitably going up. Maybe not just now, but it's coming if you trust the peak oil crowd, and I tend to. This will make building materials more expensive, AND it will make the suburban lifestyle many have grown accustomed to less and less sustainable. Which will, yes, drive down the price of single-family dwellings, and quite possibly create new ghettos.
(3) Unemployment is certainly going to rise, at least over the next 18 months. The bald dude on CNN keeps telling us that there are 600,000 unemployed in the U.S., or maybe that's newly unemployed. It's going to take a while for the actual monies involved in this bailout to filter out into the real world, and the consequences of what is already in play seem likely to continue the pattern of growing unemployment. The financial sector is contracting. So is every other sector that is dependent on discretionary income and impulse purchases. So if we have more unemployed, or semi-employed, or folks just getting by, that necessarily means more mortgage defaults, more foreclosures, more homes on the market at a reduced price.
(4) Homes were dramatically over-valued at the peak of the market, and my strong sense is that they continue to be overvalued. Let's take the house in which I was raised, for which my parents stretched in 1964 to pay $37,500. Using one of my favorite little widgets, here, the Minneapolis Federal Reserve tells me that amounts to $257,330 today. Which seems about right. Except the house next door, built by the same builder of the same materials in the same neighborhood with pretty much the same view, it sold for almost a million bucks the last time it went on the market. Now I don't even begin to know who can afford that kind of a house, nor can I guess what kind of crimes they must do to get into that income bracket. Leaving all that aside, those numbers suggest plausibly to me that the real estate market is nowhere near its bottom.
None of which matters. Obama and McCain and Bush and the whole Congress have bought into the idea fixe that this must be done, and so now we're left to debate oversight and executive compensation and maybe, if we're lucky, the dollar amount they choose to hemorrhage on this nightmare.
But what nobody seems to be talking about is what happens after, what happens if doomsday tinfoil hat folks like me are right and the real estate market continues to trend down. Surely it will in the short term, so it's crucial that whatever deal is struck with Wall Street involves hanging onto this worthless paper through a long downturn, but that's a hell of a gamble. It might really be worthless paper.
Somebody else here suggested that instead of bailing out Wall Street we take that money and pay down everybody's mortgage, which would keep some people out of foreclosure and put more money in circulation through the banks, right? It'll never happen, but it sure would be nice to see the government work from the bottom up, and not the top down.
Meanwhile...if I prayed...