Watch as Secretary Paulson tries to run for cover.
He correctly mentions that Fannie and Freddie’s terminal defects predate his Treasury post. He also rightly asserts that today and Lehman differ from March and Bear Stearns. That said, he should have left Bear Stearns alone in March. That bailout was futile and ill-conceived.
In addition, he mistakenly labels the housing correction as “the root of the problem.” That’s politically convenient but not true. The inevitable and ongoing housing correction is the solution to this problem.
(i.) Home prices in the US have been bid up artificially high and (ii.) too many homes have been built due to (a.) Fannie, Freddie, the Community Reinvestment Act, and hundreds if not thousands of other policy initiatives, and (b.) the Fed leaving rates too low for too long.
We can’t and won’t get out of this morass until the market can clear housing inventory. To do so, prices must fall, and the government should get the hell out of the way.
