"The sooner prices are allowed to naturally fall to normal, post-bubble levels, and the sooner that houses become affordable"

I said that there were people who felt that the Fed's plan to help people buy houses was a mistake. Declan McCullagh on CBS News is one of them:

"In reality, more government intervention will do more harm than good. The sooner prices are allowed to naturally fall to normal, post-bubble levels, and the sooner that houses become affordable, the sooner the economy can heal itself and start growing instead of contracting.

By way of analogy, imagine a reprise of the Dutch tulip mania of 1637. Say the price of tulip bulbs has grown handsomely in the last few years, and impressive fortunes were made by early speculators.

Bidding wars erupt, with the winners hoping to resell them the bulbs at a handsome profit months or years later. Cable TV hosts proclaim that a golden age of prosperity has dawned. Prized bulbs change hands for $1 million each, and skeptics are reviled as doomsayers.

Eventually this boom leads to a bust, as new buyers become scarce, and the price of tulip bulbs suffers a dizzying fall down to $10 each. Speculators complain to Congress. Politicians pledge to use tax dollars to purchase bulbs for $1,000 or $10,000, invoking phrases like "stability" and "liquidity crisis," or offering taxpayer-backed loan guarantees to speculators.

This would sound silly for tulips, but it's close to what's happening for houses. All this will do is slow -- and not arrest -- the process of prices falling. Not even the president of the United States can veto the laws of supply and demand.

It's difficult to convince someone to buy a tulip bulb (or house) today if he thinks the price will be a lot lower in a year. Worse, government spending diverts funds away from productive purposes, including investment, education, and infrastructure. "

In general, I agree with this. But, there's one problem with this comment. It assumes that the people buying houses now won't be able to make their payments going forward. But what if they can? What if the problem isn't that current home purchasers are going to get into trouble, and banks aren't lending to them because of that. Rather, many people who can clearly afford the houses they are going to buy are being turned down because of the situation of the banks, which is being locked into a shell-shocked aversion to risk, and using money to clean up their books? How would you know?

"By usual metrics, such as the ratio of prices to incomes, the ratio of rents to mortgages, and the ratio of current prices to expected ones, some areas of the country still look pretty bubbly.

In the decade ending August 2008, according to S&P Case-Shiller data, house prices in New York metropolitan area leaped by 2.2 times, though incomes grew only modestly. The Washington, D.C. area experienced a 2.1-fold jump -- while non-bubbly areas like Cleveland saw an increase of a mere 1.17 times, which is consistent with incomes and inflation.

The median family income in Allentown, Penn. is $46,400, and the median home price is $125,000, meaning houses tend to cost 2.7x the median income. Compare that to San Francisco, where homes consume a whopping 11.6x the median annual salary. "

What if the usual metrics are wrong? They are failing to figure in demographic changes, regulation changes, wealthier people moving and concentrating in new areas where they drive up the prices,etc.? The real world metric is simply whether or not people can afford their houses. Is that metric written in stone?

"Robert Shiller, who teaches economics at Yale University, has calculated that housing prices have remained remarkably constant from 1890 through 1998, rising only 13 percent when adjusted for inflation -- through world wars, the automobile, and the rise of the two-income family. When the dot-com bubble burst, money flowed into real estate, encouraged by the Federal Reserve cutting interest rates more than prudence allowed. "

The Spigot Theory again. What does "more than prudence allowed" mean? Let's say it made it easier to fund a mortgage. Did that automatically lead to irrational and asinine lending practices?
What's the connection between low interests rates and fraud and stupidity? Is there a law for that? I'm trying to understand this phenomenon in a way that explains the way actual human beings act. Oh my God, interest rates are low, let's throw caution to the wind.

"Which brings us back to a taxpayer-funded "rescue" of homeowners. It's true that many people who bought homes in the last decade acted responsibly, made sizable down payments, and purchased a house within their means; they owe more than they paid through no fault of their own.

On the other hand, many people were speculators, fibbing about their income, lying about their assets, and treating their house as an ATM to finance cruises and flat screen TVs. Many banks were in on the game, knowingly placing people in homes they couldn't afford. Even if a bailout is justified, Washington is in no position to determine who's deserving and not. Any bailout punishes renters and Americans who were fiscally responsible by taxing them to benefit those who weren't.

Prices in some areas need to fall, and the market needs to return to normal. Eventually it will. All Washington can do is prolong the pain. "

Is a mortgage deduction taxpayer funded? My problem with this analysis is that it assumes a model of the economy to be the real economy, which has recently been proven to be a less than perfect mode of analysis. At any point in time, there are all kinds of competing incentives and disincentives moving people's decisions this way and that. It might well be that the government will, to some degree, "prop up" home prices in some theoretical model sort of way. But, on the other hand, if the people buying the houses today can afford to buy them and do, then the prices were not artificially propped up, and, even if they were or are, if people can and do freely purchase them, then the market worked. The market only fails if a significant number of people default, since there will always be some defaults. Does he really believe that new buyers, in this market, are radically prone to default?

Do I support the Fed's actions? Not really, no. But I understand what they're trying to do, and am not so sure that it can't work because of a theory I hold, however dearly.

Of course, I'm talking about houses. What works for tulips, I haven't a clue.