The Bailout

The housing market is still locked in a self-reinforcing deflationary cycle. Until the cycle is broken there are only two ways out. 1. Government intervention. 2. Collapse to much lower than equilibrium levels.



A few words on each of these.

1. Government intervention won't work unless it's done in the right way. Paulson's plan won't work unless the government pays more than the mark to market value for MBS. Pro on this bill is that it may straighten out who now owns these mortgages and eliminate barriers to working out new payment terms. Therefore, this plan should be combined with an effort to restructure delinquent loans. Con is paying more than market value.

2. Collapse may happen because there seems to me to be a belief that it can't happen. We think we're too smart, etc. This is exactly the sentiment that precedes the fall, in my opinion. I just saw a front page Yahoo! newsline that read "The Depression: Why It Can't Happen Today." Con is depression. Pro is prices of everything get cheaper.

And now I want to talk about the dollar. DJIA down 800, dollar up. DJIA up 500, dollar up. What gives? Bankruptcies all over Europe. Canadian dollar dropping 2 cents as well. This trend will continue.

Deflation is here. History may very well look back on this day and say Bernanke didn't print enough.