In an essay/column in this week's issue of The New Yorker magazine ("Paulson's Plan," December 17, 2007) writer James Surowiecki offers a more-somber analysis of the subprime mortgage default issue than, say, Financial Times' columnist Martin Wolf.

In Surowiecki's analysis, (which, readers should note, was researched and published before the European Central Banks' infusion of $500 billion Tuesday to ensure year-end liquidity for banks), the current problem is one unlike any other that Wall Street has faced. The problem is not liquidity, as Martin Wolf argued, but 1) high-risk home owners who spent way too much n overpriced houses, and 2) a deep mistrust of the financial system because of the way the system rates and values assets like mortgages.

At issue: Wall Street?

Hence, the Bush Administrations' proposed assistance plan to the mortgage sector and some homeowners, even if it becomes more-encompassing, would not solve the problem: the financial system - - and presumably Wall Street - - simply does not rate and value assets correctly, and the government package doesn't speak to that dimension.
Still, Surowiecki's analysis, though lucid, is somewhat sparse on evidence, and while it also touches on a dimension of the current predicament, it does not correctly identify the problem. For example, few examples are cited regarding mis-priced assets outside of mortgage-backed securities. Further, part of the problem with MBSs was not that the financial system incorrectly valued risk, but that investors, in a considerable part of the world, seemed to ignore the reality of risk: the disregard of risk, or put another way, a huge appetite for risk, took place not just in the housing sector but across sectors for the better part of 4 years.

The article's other main point - - that a good many high-risk home owners spent way too much on overpriced houses - - and that help is not possible for many of these cases, simply is not correct theoretically or demonstrated by past policies. On the contrary, economic and public policy data points indicate that if the public policy is structured properly many homeowners can retain their homes, and the number of foreclosures can be drastically reduced. (One could cite dozens of government interventions. Here are few: the Savings and Loan rescue program, the Bank Reform acts of the 1930s, Social Security, Medicare, and Medicaid.)

One could argue that the costs to the federal government, and by extension to taxpayers, of a housing program would be too high: it would cost taxpayers too much money. But that is a political/philosophical argument, not an economic or monetary policy argument (let alone a resource argument).

The American Dream

To be sure, there will be pundits and analysts, perhaps Surowiecki included, who will argue that righteous economics is guiding their politics. As a refutation, and as a defense of the housing market even in the midst of its worst slump in decades, the interventionist could cite former U.S. Federal Reserve Chairman Alan Greenspan, who argues, quite persuasively, that the benefits of broadened home ownership are worth the risk.