The Defeat of the Paulson Bailout And What It Means for Real Estate
Well, here it is October, and we have a few days to wait before the real estate sales statistics for September are robust enough to publish. So that leaves me with a day or two to reflect on the bailout, and try to flesh out what I think it all means from the perspective of those buying and selling homes. I’ve made no secret of my opposition to the bailout — indeed, calling it a bailout just now instead of an “economic rescue plan” should have pretty much given my position away.
You’d think I’d be pretty excited about the bailout’s defeat, though as a Democrat I found it surreal in the extreme that we’d finally get an opposition party to the anti-constitutional mayhem of George W Bush — and that the opposition party would be (largely) his own Republican colleagues. More encouraging, perhaps, was the analysis done by Nate Silver of FiveThirtyEight.com that shows that the people who killed this thing were — you’re not going to guess this one — the people of the United States, acting through their representatives!
Wow. Surprise, surprise.
Predictably, Time Magazine spun the events of the last few days not as an unusual triumph of representative government, but as a failure of Congress to lead.
And when they needed it most, our nation’s leaders found they had squandered their ability to exert influence over the people who chose them to lead.
No, we didn’t choose them to lead, you corporate mouthpiece jerk — we chose them to follow! House of “Representatives” – get it? Of the people, by the people, FOR the people. Get it?
But Enough About Politics? What About the Impact on Real Estate?
To give the people calling the bailout an “economic rescue plan” their due, there really are several issues afoot here, and we can discuss them separately.
- Does the economy need rescuing?
- Is it the role of government to rescue the economy?
- Would the Paulson plan have succeeded in rescuing the economy?
I believe the answer to question one is that the economy in particularly bad shape, so yes, someone with better ideas than me should do some intelligent things to it. My answer to question two is that the question itself is miserable, being on a par with this one: Is it the role of a husband to help his wife up after he beats her? No, no, no! The role of the husband is not to beat her to begin with, but to do things that will render her prosperous. Government broke the economy by deregulating it (in concert with other ill considered policies like not fixing our trade deficit and cutting taxes while having a war). Having broken it, they then proceeded to try to minimize the negative impact on the same rich people they were helping out when they deregulated it. If Paulson’s bill had repealed one or two acts passed in the late 1990s that rolled back the New Deal protections that would have prevented this fiasco, I would have been for it. Throwing money at a broken, deregulated economy without fixing it is like helping your wife up just so you can hit her again. This is the core of my opposition to the Paulson Plan — that it needed to solve the problem in the long term while fixing it in the short term.
As for my answer to question three, my honest answer is “I don’t know”, but with that, I’m in good (or at least: wealthy) company. Paulson doesn’t know either. Neither does anyone else. I do think it’s result would have been to artificially inflate the price of mortgage backed securities, credit default swaps, and (to a lesser extent, but ultimately) real estate.
So Now What?
Well, if credit completely dries up, it’s an understatement to say that that’s not good for my business. Nor is it good for anyone buying or selling a home (unless you mean by anybody the guy with plenty of cash). Over the last two years, there has been a gradual shift toward programs like FHA, as well as a tightening of lending standards that, in my opinion, has been mostly healthy. Writing reasonable loans to people who have the means to make the payments should have been what lenders were doing all along.
On the other hand, turning off the spigot entirely would sure be a bad thing for a lot of people. Personally, as the market has declined, I’ve been less personally frightened by (actual) falling prices than by the (potential) specter of an extremely tight money supply.
I don’t need to tell you how bad a large scale stoppage of credit would be. The government’s been scaring you for two weeks with that, and the details are well known. The government saying this possibility is immanent is not that frightening — because they lie so much I don’t trust them. What scares me is that guys like Robert Kuttner are saying it, too, and I trust him.
Meantime, I think the effect of a Paulson bailout or one like it would be that it would work or it wouldn’t, but all it would do would be to prevent a worst-case scenario of credit drying up. Short of preventing the worst results of that, I don’t think it would have had much effect on prices. The help for those already in foreclosure might have done some good, but preventing the next wave of foreclosures means reforming the system at all levels: from the mortgage broker, to the banks, to the credit agencies rating the paper, to Wall Street.
It also means educating consumers. I’m happy to say I’ve tried to do this all along with my standard buyer speech: “There are two prices — the one you’re comfortable with and the one the lender will give you.” (Of course, those of you who hate Realtors® can blame me, too, if you want, for all the good it will do. Let me know if you can move the DOW by hating me, and I’ll invest and then start hating me, too).
Ultimately, having an economy that relies solely on the real estate market is completely unsustainable. People need to buy the houses, after all, and they need to have a job to buy one — at least in most years except 2004!
Update: After writing this I learned that the Senate is voting on an awful version of this bill today, so calling it defeated may be premature. Having repeatedly waged war on behalf of the top 1% of the wealthy against the American people, it was probably naive to think Congress would let us off this easily.
