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Re: Interesting comment on bailout plan
From: David Farber <dave () farber net>
Date: Fri, 26 Sep 2008 05:04:56 -0400



Begin forwarded message:

From: "Dave Wilson" <dave () wilson net>
Date: September 26, 2008 3:29:35 AM EDT
To: dave () farber net
Subject: Re: [IP] Interesting comment on bailout plan

Speaking solely for myself, in fact this is the stated point of the Administration's plan: Deliberately pay more for these securities than they are currently worth. Mssrs Paulson and Bernanke claim to be laboring under the delusion -- in my darker moments I suspect they don't actually believe this at all, meaning this may quite possibly be one of the most cynical ploys anybody has ever attempted in the United States -- that the market has panicked and that these items are actually worth more than the market will pay for them at the present time. They hope to buy them up for what appears to be a premium, wait for the market to come to its senses, then resell them at an even higher price. What could possibly go wrong?

In truth, I would argue that if this were an *actual* panic, that's not a bad plan. But the numbers are pretty clear: You can't afford a $400K mortgage on a five figure income. People have overpaid for their housing and now new buyers simply can't afford to get in without the "free" money that allowed those generous exotic mortgages. Now the ponzi scheme that was the American real estate market of the 21st century has largely seized up, and we won't see a lot of movement until 1) Average housing prices fall to the level of the average family income; or 2) Average family incomes rise to parity with the price of the average house; or 3) Inflation converts a $500K house into the equivalent of a $250K house. Guess which is most likely to happen, (the correct answer, in my estimation, is all of the above) and place your bets accordingly.

I would argue that, far from being a panic, this is a market that is returning to rationality. The apparent suddeness of the collapse on Wall Street after two years of declining home prices reflects the insane amounts of leverage (borrowing) these firms engaged in, and their frantic attempts to raise capital to pay their bills once the true magnitude of their bad bets became painfully obvious to the market. It's funny, I have lost patience with those who worship at the altar of a free market that cannot, by definition, make an imperfect choice -- to paraphrase Robert Heinlein's observation about democracy, market theory says a million morons make better decisions than a single moron -- but in this particular instance it seems clear that the market is in fact returning to rationality (or at least has become mistrustful of the hype) and that's what's causing the collapse. There's never been a better time to buy a house...unless you wait till next week. Oh, and read Princeton economist / NYT columnist Paul Krugman on the Administration's rescue plan; the guy keeps knocking them out of the park:

http://krugman.blogs.nytimes.com/2008/09/24/a-700-billion-slap-in-the-face/



-dave

On Thu, Sep 25, 2008 at 8:19 PM, David Farber <dave () farber net> wrote:


Begin forwarded message:

From: "David Boyes" <dboyes () sinenomine net>
Date: September 25, 2008 4:11:44 PM EDT
To: <dave () farber net>
Subject: Interesting comment on bailout plan

For IP if you want.

A comment from a NPR Marketplace article posting this morning:

Bill Devine
From Brooklin, 09/25/2008
If our financial markets are true to form, the instant the bailout package is approved, the price for these "toxic" mortgage-backed securities will skyrocket. Seems to me one restriction might be to establish the maximum purchase price at 110% of their street value on Monday, September 22 (or other pre-approval date). That or cap it at the book value so we at least get the benefit of the investment banks' write-downs.


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