I do my best to just ignore Ben Stein's columns in the Sunday NYT, but for some reason I looked at the latest one. Guess what -- most mortgages are not in default, most people who want jobs have them!!! I guess times have never been better. Stein is again noting that the likely cost of defaults in the subprime market are relatively small, he therefore concludes that we have nothing to worry about. What Stein failed to notice is that the reason defaults in the subprime market are soaring is that house prices are falling, and in many former bubble markets, like San Diego, Las Vegas, Tampa, Phoenix and Miami, they are falling at double-digit rates. We may see as much as $8 trillion in housing bubble wealth disappear before the incredible excess supply of housing dissipates. That is a big deal, even in a $14 trillion economy. It is virtually certain to lead to large cutbacks in consumption, since people can no longer borrow against their homes. It will also lead to defaults well beyond the subprime segment as many homeowners will opt not to repay $400,000 mortgages on $250,000 houses. But, Ben Stein isn't worried because the stock market is at a record high (not adjusting for inflation). Stein undoubtedly thought that things were just fantastic in Japan in 1989. After all, the Tokyo stock market was worth twice as much as the U.S. market. How could things be better?
--Dean Baker