Treasury Sec. Goes Bearish

Posted by Dave Fratello on Tuesday, October 16th, 2007 at 7:42pm.

The Bush administration is not known for its downcast assessments – quite the contrary.

So today's remarks on housing and the economy by Henry Paulson, the treasury secretary, are indeed "sobering," as the Wall Street Journal puts it. Paulson said (all emphasis below is added):
The ongoing housing correction is not ending as quickly as it might have appeared late last year. And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet.
How did we get here?
The housing correction has its roots in an eight-year period of exceptional home price appreciation which was fueled by an increased demand for, and an abundant supply of easy credit. Speculation also played a significant role, as the share of buying activity by investors or individuals buying second homes more than doubled from 2000 to 2005. Homebuilders responded to the extraordinary demand for more and larger homes as if it would last forever.
It seems we all agree on that.

What's on the horizon?
[D]espite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.
Uh-oh. It's widely acknowledged that the one thing that poses the greatest future risk of major home price declines is the possibility of a recession. (A word not mentioned in Paulson's speech.) Here, the Treasury Sec'y is saying home price declines could lead us to a recession, which in turn could lead to home price declines, which in turn... uh-oh.

You might find it a little bit surprising that the administration is open to a series of new regulations:
We also need to make some changes in our laws and rules in order to prevent some of the excesses and abuses of the last few years from happening again.
Among the issues Paulson addresses:
  • the possibility of federal regulation of mortgage brokers (to bring a "higher level of integrity to the mortgage origination process," achem);
  • tougher rules for credit rating agencies (the unseen facilitators of the CDO and subprime messes); and
  • more federal regulation of mortgage disclosure and other issues.
Click here for the full text of Paulson's speech. It's not all that different from analyses by independent commentators over the last 2-3 years, but it's the fact that this comes from the Treasury that makes this big. It appears we may be living in interesting times.
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