Paul Krugman - We need Workouts Not Bailouts

[EV_Ares]

Workouts, Not Bailouts by By Paul Krugman of The New York Times

In April, Henry Paulson, the Treasury secretary, declared that all the signs he saw indicated that the housing market was "at or near the bottom." Earlier this month he was still insisting that problems caused by the meltdown in the market for subprime mortgages were "largely contained."

But the time for denial is past. According to data released yesterday, both housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall. And if historical relationships are any guide, home prices are still way too high. The housing slump will probably be with us for years, not months.

Meanwhile, it's becoming clear that the mortgage problem is anything but contained. For one thing, it's not confined to subprime mortgages, which are loans to people who don't satisfy the standard financial criteria. There are also growing problems in so-called Alt-A mortgages (don't ask), which are another 20 percent of the mortgage market. Problems are starting to appear in prime loans, too - all of which is what you would expect given the depth of the housing slump.

Many on Wall Street are clamoring for a bailout - for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust - it would be saving bad actors from the consequences of their misdeeds.

For it is becoming increasingly clear that the real-estate bubble of recent years, like the stock bubble of the late 1990s, both caused and was fed by widespread malfeasance. Rating agencies like Moody's Investors Service, which get paid a lot of money for rating mortgage-backed securities, seem to have played a similar role to that played by complaisant accountants in the corporate scandals of a few years ago. In the '90s, accountants certified dubious earning statements; in this decade, rating agencies declared dubious mortgage-backed securities to be highest-quality, AAA assets.

Yet our desire to avoid letting bad actors off the hook shouldn't prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.

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http://www.truthout.org/docs_2006/081707C.shtml