It is not the case that “We have nothing to fear but hear itself.” (implied here), we have to fear the many bad mortgages we have made.

We were building houses that were good quality, but their market value turned out to be much less than what the bond holders estimated because there were too few buyers that were able and willing to pay price on the books. The fundamental solution begins by stopping the building of these houses, and build things with a real market value. Was there a better way to see this than letting Lehman fail?

Today, 2009Jan 20, Obama was sworn in. He said briefly that today’s workers were as productive as they were a year ago. I agree and this is commonly heard early in a recession but this time there is something different and relevant, perhaps. What is different now and a year ago is our estimate of the productivity of many people living in houses they don’t own. They took out mortgages that they could not have in previous decades. The difference between this recession and previous is that savers thought that by such investments they were saving for their old age and now discover that people who would normally be obligated to provide the real wealth to make old age of the savers more pleasant, are incompetent to do so.

I do not recall an analogous situation in previous down-turns.

China has $10¹² in treasury notes and Fannie & Freddie bonds. We need to produce some global wealth like we used to; we need to build things and services that the world wants. (P.S. 2011 I have just learned that when an I-phone that was produced in China is shipped to the U.S. it counts on the export-import balance stats at its full retail price. This is clearly a big mistake. The amount of the discrepancy, however, is an Apple trade secret.)

Prices are signals. The current crisis is a signal that we have been building too many houses. (Think ‘price of CDO’.) Some of the proposed remedies to the crises amount to muffling the signal—a bit like shooting the messenger.

It was a convenient delusion that the people who moved into many of the new houses were sufficiently economically productive to repay. ‘Solutions’ that try to preserve this delusion will at best postpone and intensify the problem.

The new law pours water on the smoke instead of the fire.

I hear that new proposed steps will make our economy as strong as ever again. That suggests that our problem is that we are deluded that we are doing poorly and the remedy is to undelude ourselves. I think we were deluded before and now realize that we must produce wealth differently, or perhaps produce a somewhat different sort of wealth.

You can’t get out of this crisis by further delusion by such steps as pretending that bank assets are worth more than they are. There are many with mortgages that they can’t pay for: they can’t produce the implied wealth. The delusion stems from when the mortgages were written. Those holding such paper must recognize that.

Quotes

• There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets.
• To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages.

‘Catastrophes as signal’ metaphor: The saving grace of catastrophes is averting worse catastrophes:

There are bacteria with rotors which propel them in some direction. They sense concentration of nutrients. When the concentration begins to decline they briefly reverse the rotor. This causes them to tumble and face in a new random direction. Then they resume forward rotor mode and proceed in that new direction. This seems to be a winning strategy. Our economy just had such a reverse. Just possibly we can do better than random.