Paul Krugman, The New York Times, October 22, 2007
Mr. Greenspan was wrong in 2004, when he sang the praises of adjustable-rate mortgages. He was wrong in 2005, when he dismissed the idea that there was a national housing bubble, suggesting that at most there was some “froth” in the market. He was wrong last fall, when he suggested that the worst of the housing slump was behind us. (Housing starts have fallen 30 percent since then.)
But his latest pronouncement — that the market rescue plan being pushed by Henry Paulson, the Treasury secretary, is likely to make things worse rather than better — looks all too accurate.
To understand why, we need to talk about the nature of the mess.
First of all, as I could have told you — actually, I did — there was indeed a huge national housing bubble.
What even those of us who realized that there was a bubble didn’t appreciate, however, was how much of a threat the bursting of that bubble would pose to financial markets.
Hell, I knew it was a bubble a good three/four years ago. I was living in Massachusetts, owing $100k on our house, which for various reasons we could scarcely afford. $1100 mortgage payment, oil heat, etc. The principal had only gone down about $15k in ten years. But prices had appreciated to the point where I could sell and move away with $100k in pocket, go somewhere more affordable. I was in a hurry because it was obvious to me that most Americans now cannot REALLY afford to pay a fifth of a million for a house, which is now considered CHEAP! It’s like we’re down the rabbit hole. Anyway, I finally got a transfer to North Carolina and did indeed clear $100k, barely enough to get into a decent house here. Difference is, unlike so many people who listened to Greenspan, we’re no longer in imminent danger of foreclosure.
I frankly can’t understand how so many people could believe this guy when he said things that logically could not possibly be true. Average wages have been stagnant for more than a decade, yet housing has doubled in price, and somehow is still affordable? Sure, if you get an interest-only loan (i.e. ‘rent from the bank’) and work 80 hours a week. You can do that till you’re in your seventies, can’t you?
One of the big reasons housing prices go up so is that your dollar is competing with the dollars of the overrich who don’t pay their share of taxes any more.
Comment by Evolver — October 22, 2007 @ 8:18 pm