Housing Bubble Burst Creates Toxic Assets

We knew that housing prices seemed too high for many years. In the Washington, D.C. Metropolitan Area alone, we wondered how federal government workers could afford $800,000 mortgages for what looked like $300,000 homes. This is just to illustrate that there has been more than just the subprime crunch going on out there. We also wondered how mortgage backed securities could make enough money to service a trillion dollars in debt yet still generate profits to keep stock prices high. Well that bubble burst as it had to and now Wall Street wants welfare. Fannie Mae, Freddie Mac, Bear Stearns and AIG went on welfare first. Now their associates are lining up to get public assistance. Although the situation is dire, and while Bernanke, Paulson and Cox are testifying in the Senate for an emergency $700 billion food stamp, members of the U.S. House of Representatives are rebelling against the proposed bail out package. Moreover, nobody really knows if the Wall Street bailout will work or whether it will simply end up being the first installment of an unlimited credit card. Financial instruments are now being described as toxic assets.

So what is the solution? We propose a hybird that includes some relief for Wall Street combined with some significant relief for mortgage holders and renters alike. Maybe $4,000 to each taxpayer and that combined with the stimulus package payment of $600 earlier this year would get American capitalism back on track. At a minimum it might give us all time to figure out how to get the economy humming again without becoming a complete socialist state. China is rolling in money because they have yet to become addicted to debt. Yet they are buying our paper and Heaven only knows what will ever happen if those chickens ever come home to roost. That check could bounce. Our guess is that they will want military equipment and technology in return. Mao would. [Hat Tip: Sharon Welborn]