Big Sh-tpile and Why Geithner’s Plan Won’t Work

Paul Krugman succinctly lays out why the Geithner/Obama* plan won’t work:

Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You can’t walk back a lost bet, and doubling down isn’t an option.
We can spin this around and around and throw up spaghetti code arguments, but, at the end of it all, housing prices aren’t coming back any time soon. Wages are too low, and the days of brain-dead credit are gone. There are six million unsold houses, with twelve million more vacancies not yet on the market. When you consider that in the S&L crisis, when impartial auditors examined the books, things were usually worse than previously thought, how anyone thinks this toxic sludge is undervalued escapes me.
The real crisis isn’t the banking system (we will have banks, just maybe not the current crop of megabanks), but that many people will either enter foreclosure and lose access to credit, or sink too much of their current and future income into houses for which they paid too much. Until Geithner et alia deal with that, housing prices–and the Big Shitpile erected upon them–will stay stuck in the mud.
Update: What Amanda said:

My feeling is that we’re taking a hit on the economy any way you slice it, so why can’t housing costs come down to a point where ordinary people working honest jobs could, you know, buy a house? Before the crisis really came to the forefront, I couldn’t even believe how high housing prices got, because it seemed impossible that there were so many people that were so rich that they could afford homes that cost a quarter of a million dollars or more. What we’ve learned now is there weren’t that many, and that loans were being extended to people who simply couldn’t afford them, and the housing market was artificially inflated. And now the common wisdom is that we have to keep the average price of a house way out of the range of what most people could ever afford to keep the economy from tanking. The flaw in that reasoning should be obvious—it’s a forest/trees problem, where everyone is concentrating so hard on the immediate problems that they don’t realize that not addressing the larger crisis just means putting off the problem into a future that will be here soon enough. If they prioritized the issue of affordable housing over the whinging of bankers, I suspect their decisions would be sounder.
This is also why I’m repulsed by the idea that all we need to do is make sure there’s more money available for borrowing out there.

*Last I checked, the buck still stopped with him.

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4 Responses to Big Sh-tpile and Why Geithner’s Plan Won’t Work

  1. NoAstronomer says:

    I’m no financial genius but here’s my take on why the plan can’t work:-
    Because the plan is trying to ‘fix’ the existing economy which is based exclusively on consumer debt.
    That economy no longer works. It’s arguable whether it ever actually worked, but for sure it can’t work now.
    Furthermore we now need to spend the next 20-30 years paying off the debt we ran up in the past 10.

  2. That was a great post by Amanda. It’s amazing how she gets so many different things so completely right.

  3. The reason that honest people can’t afford to buy a house is that these houses are poorly designed and constructed. Most of them are in excess of 50 years old. Thermodynamically they are complete failures. You soon won’t be able to afford to heat or cool them let alone afford them. You people need to look beyond the economics and look at the physics. Hint : Earth shelter, earth berm and passive solar. We could start building affordable housing right now. What we have now is obsolete, and what this administration and YOU seem to support is building yet more of this kind of physically and economically untenable CRAP.

  4. Scrabcake says:

    I have to agree with Amanda. I live and work in California, and I idly calculated that on my salary, my great grandkids would still be paying off my house as an adult if I were to buy one. The cheap My parents always owned their house, but I really don’t see how I ever could, and I’m what most of the country would consider above median middle class. I’m well educated and hardworking.
    I’ve been lucky during this recession so far. I’m actually kind of cheering it on–if housing prices keep falling, maybe someday I’ll be able to move into that tiny house by the traintracks! Most of the young people I know rent, but it seems like those who do own a house weren’t all that concerned that they’d probably never *own* the house that they’d bought. I hope that attitude changes.

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