The Short Version

Ok.  I have read a whole lot of commentary on the Big Bailout Bill of 2008.  I have been hearing a lot for the last day or so that “the root problem is that real estate prices are going down.”

That is bogus. Since we can legitimately add “because” to the end of that theory and have things to put there, it cannot be the root cause.  Root causes by definition are not results of something else.

“Real estate prices” (by which I am meaning “housing prices”) are going down for two main reasons:  first, prices went up too fast earlier in the decade and we are “reverting to the old trendline” — going down to where things would be if prices had appreciated at normal levels instead of silly bubble levels; second, a combination of stagnant wages and effectively non-existent job growth means that Joe and Jane Average can no longer afford to purchase real estate, and in certain cases can no longer afford payments on real estate they purchased in happier times.  More on the economic pressures faced by Joe and Jane from a little place just outside HootervilleMore on unemployment rates on a state-by-state from the Economic Policy Institute, and remember these are official government figures that do leave out certain classes of the jobless.

The only reason Joe and Jane were able to buy through most of the decade is inovative mortgage products designed to make them think it was affordable when it was not.  The reasons Joe and Jane wanted to play were that they feared being priced out of the market, they thought it was an investment that would only rise in value, they thought surely their financial situation would improve, they didn’t understand the implications of their creative mortgage product, they kept being told how many benefits there were to owning their own home. See also:  Fannie Mae Wants You to Own a House.

I don’t see anything in any of the various financial disaster averting proposals that does a darn thing to fix those causes of the “root cause”.

In closing: Stonehenge is older that we thought; State of the Blogosphere; speaking of functional (or non-functional) financial markets, Expert Ezra on the Insurance Markets; MahaBarbara on abortion in the world; they’ve been singing professionally for 50 years, The Peanuts are perhaps better known in the West as the Mothra Twins; and the problem with optimism.  I hope to have something posted on about the state of the housing market in general later today. In the meantime, my top post is about an old solution to high housing prices.