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No Bailout Plan Will or Should Restore Fictitious Value

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the economy is one big fixer-upper

the economy is one big fixer-upper

Here’s your number one problem. We got into this mess because of inflated housing values, sourced from low interest rates, easy-lending, lax regulation and runaway derivatives. The bubble burst when price discovery kicked in and everyone realize they had nothing. The bottom fell out, and people who bought houses at fictitious valuations got slammed. The problem is that these fictitious values can’t be restored. They’re gone. Therefore there has to be hurt for people caught in the trap. The only way to alleviate their suffering is to restore fictitious values which are what put us in this mess in the first place.

Any attempt to mitigate loss will only end up creating more loss. I hate to sound like a conservative here, but real estate is a pure market (unlike health care for example). Houses will find their true value. We need to let that happen. All we’re doing by bailing out the homeowners is creating false valuations once more, and as important bailing out the lenders. No moral hazard, regulatory inertia and we’re just priming for a repeat performance.

If you’re looking for a home and find one that was bought at $400k which is now worth $100k you’ll buy, so will others and the demand will push the prices back up to an equilibrium once more, supporting surrounding homeowners. Neighborhoods will be restored. It’s called simple economics. Pain is part of life. It has to be allowed to happen, except where there is no justice in it. For many who made bad investment decisions, suffering is just. And for those who pushed the bad loans, the suffering is necessary punishment.

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Written by coolrebel

February 21, 2009 at 8:24 am