No Confidence in Mr. Paulson

If Henry Paulson's intention is to reassure the American people by publishing an editorial in the NYTimes today, he is not doing a very good job of it:

I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress. And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.

A troubled-asset purchase program, to be effective, would require a huge commitment of money. In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn’t enough firepower.

Pretty Lady is, of course, not an economist. But even she can see clearly that if the American economy is based solely upon real estate prices, the American economy is very ill indeed.

She once heard that the Rule of Thumb for housing is that a financially responsible person spends between ten and twenty-five percent of her income on rent or mortgage payments. This formula, she understands, ensures that a person has enough left over for groceries, transportation, health insurance, savings, clothing, education, entertainment, vacations, and other incidental expenses of life.

She thinks of this formula every now and then, and a thin, bitter smile flits across her face.

For the only time that Pretty Lady's income/housing expense ratio met this standard was...well, Pretty Lady's income/housing expense ratio has never met this standard, even when she was living in Mexico, because when she lived in Mexico she had virtually no income at all. The fact is, if Pretty Lady told you her average lifetime income/housing expense ratio, you would all stone her. You would cease to take her admonishments seriously ever again, because obviously such a fiscally irresponsible human being is not fit to be living indoors at all, let alone dispensing advice.

But the fact is, in the metropolitan areas where Pretty Lady has lived for the last twenty years, it is virtually impossible for a person who is not an investment banker to adhere to this formula, for the simple reason that wage/real estate price ratios are overwhelmingly real-estate heavy. Real estate, in short, is overinflated as though it were the basis of an economy wherein people are making far more money from real estate speculation than from actual work.

This is not, and never has been, a healthy or sustainable state of affairs.

In Pretty Lady's non-economist view, it is about time that real estate prices came down. Real estate prices are killing her, as well as nearly every other person she knows who works an actual, physical, productive job. If someone's gambling income collapses because he bet that real estate prices would continue to skyrocket forever and ever amen, and leveraged those bets at a ratio of thirty to one, that person should by rights be stripped of all his assets and given a job repairing pot holes, by hand, with a shovel and a wheelbarrow full of concrete. He may start either on Canal Street, or that section of the FDR which nearly took out her suspension yesterday evening.

Injecting hundreds of billions of dollars into the financial system with the goal of keeping real-estate prices inflated, however, strikes her as the worst sort of stupidity, if not downright malignant robbery. Provide credit to productive businesses, certainly. Extend unemployment insurance for honest workers who are out of a job; provide healthcare, education, and investment in green energy. Fertilize the roots of our economy wherever there is something actually growing. But for God's sake, quit pumping the real estate balloon. Are you mad, Mr. Paulson? Are you a fool? Or are you simply evil???