Why bailouts won’t work and prices must fall

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I hope those of you who like to make a punching bag out of my employer (no, not Sam Zell, the Los Angeles Times) have noticed that the newspaper continues to publish full-throated, anti-bailout opinion pieces.

Last week it was economist Christopher Thornberg’s politically incorrect, but historically obvious argument that the housing bubble was caused by ‘greed on steroids.’

Today it’s Peter Schiff, who writes on the opinion page that bailouts won’t work, and housing prices must be allowed to fall to a ‘sustainable bottom’ -- levels supported by the market, not by government intervention.

Highlights:

‘At current levels, the average American still can’t afford the average house. Despite the creativity of its new policies, Washington can’t alter that math. The only mechanism to restore balance and get the credit flowing is for prices to fall steeply to a true market level, and for losses (for consumers and corporations) to be recognized and absorbed.’

‘The government is trying in vain to get funds flowing again and put a floor under prices. But it’s too late. U.S. home prices are like a beach house supported by eight pillars: lax lending standards, low down payments, ‘teaser’ interest rates, widespread real estate speculation, pliant appraisers, willing lenders, easy refinancing and a market for mortgage-backed securities. Knock out even half of these pillars and the house comes crashing down. We’ve knocked out all of them. Yet everyone hopes that this allegorical house can defy gravity and that bubble-era prices can be sustained in a post-bubble world.’

Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
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