There are numerous accounts of the bailout that discuss the possibility that taxpayers will make money on the deal when the housing market stabilizes (e.g. the print version of the Post article). This is a fairy tale. We had a housing bubble. A housing bubble is like a stock bubble. Prices get over-valued because of irrational exuberance and do not reflect fundamentals. After the bubble collapses, prices fall back to levels consistent with their fundamentals. In the current case, the bubble is about half deflated and house prices are falling rapidly. They are not falling because of the credit crisis. They are falling because of an enormous over-supply of housing. The vacancy rate for ownership units was already 50 percent higher than its previous record in the fall of 2006. This was before there was any credit crunch. The fact that Alan Greenspan, Henry Paulson, Ben Bernanke and many other others in positions of authority did not recognize the housing the housing bubble in years from 2004-2006 demonstrated extraordinary incompetence. Anyone who still does not understand that the root problem is a bursting housing bubble should not be allowed near the negotiations and certainly should not be writing news articles trying to inform the public.
--Dean Baker
