Posts Tagged ‘big ideas’

Bursting the bursting

I always appreciate Dean Baker’s thoughtful assessments of the dynamics of the housing markets, so I was glad to belatedly come across his December brief advocating for the systematic deflation of housing prices, by basically putting Fannie Mae, Freddie Mac and Ginnie Mae on strike in overpriced housing markets until sales prices come down — they would simply stop buying mortgages there. Eerie overtones of Fannie’s history of redlining aside, it’s an appealing idea. Housing prices indeed must come down. But there’s one thing I can’t get past in the Baker plan: doesn’t deflating housing prices kick out whatever wobbly support all the existing mortgage backed securities (and their derivatives) depend on? After all, those falling housing prices reflect the collateral on which all those securities are underwritten. Deflate those rapidly, as Baker is suggesting, and it would cause even greater havoc to the banks vested in those securities than we have now. And much as I don’t feel for the banks or bankers that made the misery, we can ill afford to worsen their plight now.

I do like Baker’s idea of a structured rental program for owners who’d otherwise go into foreclosure — companies have been doing these leasebacks anyway, under conditions that leave the now-tenants with few rights. Better to bring the practice out into the daylight.

Tuesday, January 27th, 2009 | Tags: , , ,
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