The economy

[galadhelsul]

The bailout bill passed the House today, after failing on Monday. Since it already passed the Senate, it will probably be signed into law this evening or weekend. All the idiots that thought this bill had to be passed because otherwise the stock market would keep falling until it destroyed everyone's 401(k) balance can now rest easily with the

Comments

[vfish]

Housing: I still think that funds from any bailout should have been directed primarily toward shoring up the mortgage market. For far less than $700 billion, the government could easily ensure that virtually no home mortgages go into default. A program of renegotiating predatory mortgages would have offered great assistance to the homeowners, effectively injecting liquidity into the consumer base required to make our economy function. Banks would have gone along with the plan because it's better to recover their money at a lower than expected interest rate that take huge losses associated with foreclosure. Housing prices would likely continue to decline (as necessary post-bubble), but at a more manageable rate because fewer homes would be dumped back into the market due to mortgage default. I'll defer to economists on the issue, but it feels that the optimal long-term solution would find a way for housing prices to level off and effectively be flat until increases in income and/or inflation bring house prices back in line with median income levels.

Four choices: Present policy is driving us toward the second choice. Let me advocate for your third choice but note that such work does not have to be "useless". For instance, the US has neglected investing sufficiently in its own infrastructure. A massive public works project that rebuilds our nation's transportation system would be an effective use of government funds, and it would create many new jobs at a time when people really need them. Likewise, serious government support of alternative energy could held drive the economy for a while. Even neglecting pollution, climate change, and geopolitics, simple physics dictates that our future depends on developing an alternative energy system not based on fossil fuels. Our economic future also depends on rebuilding the manufacturing sector, and green energy will help do that.

Politics: As you note, this will require higher taxes. Fortunately, America is starting to wake up to the fact that starving the government of revenue is bad public policy. The short-term gain (with greatest benefits for a select few) is more than offset by the long-term loss (which is felt by everyone). This realization is a key driver of the resurgence of populism in American politics. Many on the left have been claiming that the 2008 election will be a realigning election similar to 1932. The historical parallels are becoming stronger every day.

[galadhelsul]

On housing, you have picked the Japanese 20+ year recession option. This recession will last until incomes are back in line with house prices. In most of the country (geographically anyway) house prices can be held level until incomes rise 10-20%. But in the densely populated areas where most people live, house prices have to fall by a fair bit because we can't raise incomes far enough. In the Boston area, houses are still overpriced by more than 50%. That represents about 10-15 years of income growth during normal economic times. We may never get there in a continual recession. And Boston's housing bubble is small compared to many other cities.

Mass foreclosures are the fastest way to lower house prices. But foreclosures don't have to kick people out of their houses. The government could encourage the creation of rental companies that buy houses out of foreclosure on the condition that they agree to lease it to the current occupants for at least 3-5 years. Alternatively, the government could take over the loans and offer repayment terms similar to what is available for student loans. People who can't afford payments that are somewhat above market rate rents should be forced to downsize or sell to someone who will rent their house back to them. And in no case should anyone be given a reduction in their mortgage balance that they get to keep if they sell the house for a higher price later.