Matt Yglesias

Home Weatherization

(cc photo by Clinton Steeds)

Better-insulating your home can save money and is good for the environment. So why doesn’t everyone do it? David Leonhardt explains: “Even so, we are still trying to figure out which weatherization projects we should do. The whole package would probably cost $4,500 and save us something like $400 a year. We may not stay in the house nearly long enough to justify the investment.”

The rationale of a “cash for caulkers” idea is that a short-term government subsidy to have this kind of work done would work as stimulus, and also solve some other problems, while getting around this issue. But the problem of people under-insulating their homes is really something that deserves a long-term solution. After all, the weird thing about Leonhardt’s explanation is that while he may not stay in his house the 15-20 years or so it would take to really make the full weatherization package worthwhile, the house will almost certainly still be there. In principle, having money-saving improvements to the house made ought to increase its resale value and be worth doing no matter how long Leonhardt stays in the house. In reality, when people are shopping for houses the question of how energy efficient it is tends to be an extremely low-salience issue and exactly the sort of thing someone is likely to overlook.

One potential solution to this would be to make an “energy audit” of some kind a necessary part of the process of selling a home. Make the basic factsheet include some information about both the relative and absolute energy efficiency of the home. That way people who invest in efficiency would have a better chance of getting rewarded for it.

Life in a Small House

As everyone emphasizes, the cheapest form of renewable energy is really energy efficiency—just not wasting as much energy. A cousin of this point, however, is that the truly cheapest thing of all is to just do with less. So for example, American houses actually use slightly less heat energy per square meter than do European houses. But since American houses are much bigger than European houses, we use far more energy in home heating than do Europeans. The Danes are substantially more efficient than the average Europeans, so they use less energy per square meter than we do despite living in a much colder climate. But on top of that, the average Danish house is about half the size of the average American house.

Since home-related energy use is a big deal and housing is a big component of household finances, the large size of American houses is a really important aspect of the American way of life. And it is worth asking how valuable our super-sized homes really are. It’s definitely a good thing that our modern houses are much bigger than houses were circa 1900. That brought about substantial reductions in overcrowding and real benefits in human welfare. It seems to be the case, however, that we’ve crossed over into territory where further increases in house size are driven by positional arms races. People aren’t looking for bigger houses, in other words, they’re looking for houses bigger than their friends’ houses in a way that’s not producing much of any net gains in welfare.

If that’s right, then we’re really wasting a disturbing quantity of resources not only building the very large homes but also heating them. Housing spending has the long duration properties of investment goods, but it’s not really productive the way a factory or an office building is. It’s just a very big, very expensive, very durable consumer good. Which is fine, insofar as it’s really leading to satisfied consumers. But it seems that it isn’t and if we all crowded into Danish-sized houses we’d quickly adjust, feel just as good about ourselves, and then go buy more non-housing stuff (or if we actually moved to Denmark, spend the money we’re saving on housing paying very high taxes in exchange for generous public services).

Housing and Inequality

(cc photo by Nesster)

One curious consequence of runaway income inequality in the United States is that it’s produced a bumper crop of research (not sure I’m remembering it right, but I think Marx talks about this in The German Ideology) aimed at explaining away runaway income inequality. At any rate, Reihan Salam tweeted out this paper from Enrico Moretti the other day:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers’ standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

You can think of the baseline dispute about inequality as being that on the left we think it would be a good idea to try to redistribute some wealth and income away from folks at the top and either give more money or more services to the rest of the population. On the other side are folks who think the reverse. And this housing issue, like the case of the expensive refrigerator, strikes me as something purporting to debunk concern about inequality that in fact is just offering an example of why the right is correct to think that redistribution would be a good idea.

The way I read this research result, if we take a bunch of money away from rich people it will cost them relatively little in welfare since almost half of the excess income of the rich is going to bidding up the price of housing in the kinds of places where rich people can find jobs. If they all had less money, they’d all live in equally good houses; the houses would just be cheaper. But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.

Going Bust in Loudon County

Great piece by Michael Laris in The Washington Post about ambitious real estate development gone bad in Loudon County, on the fringes of the DC metropolitan area:

They said it would be a new Reston or Columbia, 35 miles west of Washington — the biggest development in Loudoun County’s history, with more than 15,000 homes filling communities with such names as Greenfields and Broad Run Village.

Now a real estate shopping spree that made the company Loudoun’s largest landowner at the height of the nation’s housing bubble has been jerked into reverse, with a key lender moving to foreclose on more than 4,100 acres Greenvest companies pieced together for the project. The land is scheduled to be auctioned off Tuesday morning outside the historic red-brick courthouse in Leesburg, provided there is no bankruptcy filing or last-minute deal.

Part of the tragedy of our recent boom/bust cycle is that we really don’t seem to have amassed a huge amount of worthwhile stuff during the overinvestment phase. The dot-com boom at least led to the creation of a lot of bandwidth and web-related human capital that folks continued to use even once the madness of Pets.com wore off. Some of what happened in the housing bubble is at least somewhat like that—immense condo oversupply developed in DC proper but the trends indicate that it’ll be filled sooner or later and the country really does have relatively few housing units existing in walkable urban areas.

By contrast, it’s not as if when you turn the clock back to 1999 that there was some objective shortfall of largish homes in sprawling suburbs in the United States. And nobody really wants extra ones. Even in Spain where they disastrously overbuilt beachfront property you can imagine the prices resetting and people using the homes. But there are only so many households in the United States, and both the demographic (fewer families with kids) and energy (more expensive) trends point toward somewhat less demand for this sort of thing in the future.

American Housing, 1900-1990

Via Brad DeLong, an interesting illustration of improved standards of living across the 20th century:

It strikes me as noteworthy that the trend toward bigger-and-bigger houses has continued apace over the past 20 years even though by 1990 the problem of overcrowded housing had become the exclusive province of the very poor. Part of the story is that we have a number of policies—ranging from odd tax incentives to land use regulations and beyond—in place that encourage people to live in big houses. This is not a very efficient use of valuable energy and land resources, and it arguably intensifies the problem of providing an adequate standard of housing to the relatively small remaining minority that can’t afford decent shelter.

The Walkability Premium

(cc photo by chego101)

Katharine Worth writes up a new study that used regression analysis to assess the relationship been home prices and the Walk Score of the neighborhood in which they’re located. The conclusion was that “[a]fter controlling for all of these other factors that are known to influence housing value, our study showed a positive correlation between walkability and housing prices in 13 of the 15 housing markets we studied.” In other words “there is a real and measurable pent up demand for homes in walkable neighborhoods.”

Some additional thoughts. One is that though Walk Score is a fun tool, the methodology is far from perfect, and you would almost certainly see a stronger walkability/value correlation if you had a better metric for walkability. Another is that car use is associated with a lot of currently underpriced negative externalities and obviously this would look different if those were priced properly. In a more speculative vein, it also strikes me that American history has left us with a weird situation in which our cities tend to be walkable in inverse proportion to the quality of their weather. Boston or Chicago in the winter are terrible places to walk a quarter of a mile and then wait for a bus. In a city with the climate of San Diego or Los Angeles, things would look different.

Getting to Affordable Housing

A reader asks for my thoughts on DC’s new inclusionary zoning rules which basically require developers to provide a certain proportion of the units in new developments at sub-market rates. On the policy itself, I’ve heard of examples of strict inclusionary zoning rules that work well (Brookline, MA I believe is one such example) but I’m a bit skeptical that the DC government is actually up to the task of outlining and enforcing this kind of complicated regulatory scheme in a way that’s workable and beneficial.

But one way or another, this sort of regulatory mandate really doesn’t seem to be the best possible way to achieve the goal of making housing more affordable. Suppose that instead we:

— Reduced or eliminated rules mandating the construction of parking as part of new developments.

— Permitted the construction of taller structures.

— Relaxed maximum lot occupancy rules.

— Permitted the construction of smaller apartments.

That, it seems to me, would increase the supply of housing units in the city. That ought to, ceteris paribus, reduce the market price of housing thus rendering housing more affordable. It would also generate additional tax revenue and some of the revenue could be spent on subsidies for struggling families to help them afford housing. Last, it would increase the proportion of the metro area’s residents who live in the District of Columbia as opposed to the suburbs, which would be good for the environment. Adding an additional inclusionary zoning regulation on top of existing supply constraints, by contrast, seems likely to further constrain supply. Amidst a real construction boom, it’s true, these rules would result in the creation of new affordable units. But absent such a boom it simply discourages new development, meaning the city will have more vacant lots, more surface parking lots, more abandoned structures, and fewer housing units than it otherwise might.

Home Prices vs Income

Here’s a very interesting exercise from Razib at Gene Expression. First he created a scatterplot “which shows median home value vs. median household income (log-transformed).” Then he color-coded counties according to whether they were above or below the trend line. Deeper blue means you’re expensive relative to income, while deeper red means the reverse. The home price data is from the bubble years 2005-2007:

There’s a fascinating difference here between the west coast and the northeast. The areas right around New York and Boston got very pricey, but pretty quickly the counties turn red again. On the west coast, by contrast, the blue extends quite far into the hinterlands.

That said, the weather is clearly much better on the west coast than on the east coast, so arguably it makes sense that west coast housing should be more expensive relative to economic opportunities.

The New Urbanity

This is a point I’ve made casually before, but it seems Professor Arthur Nelson has a new paper spelling out in detail the implications of demographic change for the built environment. In particular, even if you assume no shift in underlying preferences regarding cities versus suburbs, and no pro-urbanism policy shifts, then the declining proportion of the population made up of families with children still implies a large shift back in the direction of urban infill.

Judged realistically, this should also open up possibilities for virtuous circles. Some people prefer to be surrounded by a lot of space, and others prefer the amenities associated with a denser urban environment, but nobody likes to live in a block with a vacant lot or around the corner from a broken-down shell of a former building. More people shifting into walkable urban neighborhoods allows those neighborhoods to capture more of what’s appealing about walkable urbanism.

Senator Dick Durbin Talks to Pat Garofalo About Housing Policy

Interesting stuff as my colleague Pat Garofalo sits down for a brief chat with Senator Dick Durbin (D-IL) and they talk about “cramdown” legislation and other possible options for stemming home foreclosures:

It’s really remarkable how much political clout the big banks retain notwithstanding everything that’s happened. And it certainly makes you pessimistic that regulatory changes currently being contemplated are going to stick. How much clout are these guys going to have once the financial crisis is a few years in the rearview?

Home Prices Stop Falling, But Why?

New Case-Shiller data has the decline in housing prices coming to an end:

Which naturally raises the question: Why? Prices aren’t back down to their baseline level. Felix Salmon says “If housing kept track with CPI inflation, the Case-Shiller index would be at 125 now; in fact, it’s at 140.” What’s more, there’s still lots of unsold inventory. Common sense says prices need to keep falling until all the recently-built, currently-vacant houses can be sold off.

Home Sales Way Up, But Still Very Low

The latest economic data:

Sales of new homes in the United States posted their largest monthly gain in eight years in June, the government reported on Monday, a sign that the housing market is bottoming as buyers take advantage of lower prices.

It’s true that this was a big month-to-month change, but if you look at it overall sales volume was still quite low; lower than at any month in 2003 or 2004 or 2005 or 2006 or 2007 and also lower than January, February, March, April, May, June, July, or August of 2008.

The House That Rove Built

Washington Post’s “reliable source” blog reports that Karl Rove wants to sell a house:

Five bedrooms, four-and-a-half baths, brick-and-stone exterior, built 1968. Real estate photos show sunny kitchen, big entertaining spaces, pleasant yard, lots of bookshelves, one wall-mounted deer head.

I suppose it’s an interesting sign of the times in the United States that Rove believes a house he paid $799,000 for in 2001 ought to fetch $1.585 million in 2009. Here’s the Case-Shiller index for the Washington, DC metro area:

The price increase Rove is looking for is larger than the average one across the metro area. Of course some people’s houses should experience a higher-than-average price increase if, for example, the neighborhood in which it’s located has become objectively more desirable. When I first moved to town I rented a basement apartment in a nice townhouse on Harvard Street between 13th and 14th. That’s a much better place to live in 2009 than it was in 2003, and even in 2003 it was a much better place to live than it was back in 1998 when the owner originally bought it. But I don’t really think you could make that kind of claim for Kent where the Rove house is. That’s a nice upscale neighborhood, but it’s always been a nice upscale neighborhood.

The Vacant Sprawl

Tucson, Arizona (My Photo)

Via Planet Money, Arizona fire departments plagued by alarms in vacant houses:

“Neighbors can hear the alarm so they call us, but when we get up to the home, it’s vacant, locked up and we’re unable to access them,” said Kevin Pool, assistant chief with the Surprise Fire Department.

If you think about the transition that pretty much every old-time American city experienced in the 1970s, you know that rising vacancy rates can really devastate a neighborhood. But in terms of coping with that kind of scenario, a traditional urban neighborhood seems to have some significant advantages over a suburban or exurban one, notably including the fact that the quality of the underlying housing stock in old rowhouse neighborhoods was generally much higher than what you see in newer suburbs. There’s a real question as to what may become of new exurban slums in areas where the supply of houses simply exceeds the number of people who want to live there.

The Annals of Publishing

Via the Economics of Contempt, here’s one book I’m glad I didn’t buy, David Lereah’s 2006 classic Why the Real Estate Boom Will Not Bust – And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market.

The author, it seems, is (or was) senior vice president and chief economist of the National Association of Realtors. The book was also blurbed by David Berson, chief economist at Fannie Mae, who said:

An important book, whether you agree with the author (as I do) that housing will remain an excellent investment or are convinced that home prices are poised for a plunge, David Lereah lays out a compelling vision of housing as a continuing positive investment—and how you can profit from real estate if you already own the home you live in, are looking to move from rental housing to an owner-occupied home, or want to use real estate as an investment.

Since the crisis hit, there’s been a lot of talk about complicated financial engineering and the ins and outs of different kinds of derivatives. But it’s worth recalling that at root there was a pretty basic and easy to understand mistake. We had developed an economy where, over a period of years, incomes were more-or-less flat and yet consumption was rising. Consumption was rising because people were going into debt. And people were able to go into debt because of rising asset price values. It was convenient for some people to believe that this was a sustainable trend but it was not, in fact, sustainable. The price of an asset like a home needs to bear some kind of relationship to people’s ability to pay for houses.

More Lagging Data on Terrible Q1

New bad data about the past:

Prices of U.S. single-family homes fell 18.7 percent in March from a year earlier, while prices in the first quarter dropped at a record pace, according to the Standard & Poor’s/Case-Shiller Home Price Indices released on Tuesday.

Remember, of course, that we already had a huge pile of data indicating that economic performance in Quarter 1 was absolutely horrible, so this should come as no surprise. But when it comes to housing (rather than say, unemployment) there really is a need for prices to come into line with fundamentals, so there’s a case to be made that steeper falls are better since they mean we’ll hit the bottom sooner.

Housing Starts Hit Record Low in April

This is not a green shoot:

Housing construction hit to a record low in April as a steep drop in apartment building offset a rebound in single-family construction. [...] In a disappointing sign for the future, applications for new building permits dropped 3.3 percent to a new record low annual rate of 494,000.

That said, I don’t really see this as “disappointing” or much of a “sign for the future.” The supply of new housing ought to be fairly fundamentals-driven. There are so many people in the country, the population is growing at such-and-such a rate, and demographics are shifting like so. Back during the housing boom, too many houses were built. Consequently, new housing starts need to stay depressed for as long as it takes for people to fill the houses. The “Hangover Theory” of recessions isn’t true as a general matter, but as applied to the specific case of the housing sector it seems like a pretty close approximation.

Edmund Andrews’ Personal Financial Crisis

Edmund Andrews’ piece in The New York Times Magazine on how her, personally got sucked into the vortex of bad debts and unsustainable lifestyles is one of the best things I’ve read in a long time. The key backstory is that Andrews wound up making all kinds of foolish debt-and-mortgage-related decisions even though he is an economics reporter for The New York Times who’d written extensively about the very problems he wound up falling prey to.

I read a good portion of Andrews’ book, from which the article is excerpted, before misplacing my copy somewhere. The book does an excellent job of weaving the personal narrative together with Andrews’ policy reporting in a manner a bit reminiscent of Jason DeParle’s book.

The Case of the $632,000 Education Attaché

A late April Washington Post item answers the question of why the UNESCO education attaché costs $632,000:

That includes the following: one GS-15 salary, plus benefits; one Paris apartment, plus parking; travel and moving expenses; education costs for children of up to $60,000; and $170,000 for International Cooperative Administrative Support Services, an expenses-sharing mechanism used by agencies for overseas staff.

I think there’s probably something to be said for the idea of a comprehensive review of housing allowance policies. In many cases, I think we pay senior civil servants too little. The government needs to be able to recruit top notch scientists, lawyers, economists, etc. so ought to be able to pay people something vaguely competitive with the private sector. At the same time, it seems to me that you could probably recruit well-qualified people for a job like this one even without the free Paris apartment.

Time to Buy Houses in Miami?

Via Calculated Risk:

The Miami real estate situation got totally crazy for a while. But Miami’s not Detroit; no reason to expect the city to enter long-term economic decline. If price/rent ratios start dropping below their historical level, they’re good investments, especially in the supply-constrained “near the ocean” locations.

(By the same token, not time to buy houses in New York)

Is There a Problem With Mortgage Securitization?

I’m broadly sympathetic to the larger theme of today’s Paul Krugman column, but his specific claim that there’s some grave problem with the very fact of mortgage securitization doesn’t seem to hold much water. This appears to contradict earlier statements of Krugman’s and Felix Salmon is convincing that the problems Krugman is pointing to had to do with synthetic CDOs rather than securitized mortgages.

More broadly, I think focusing on the specific instruments through which a bubble in home prices was transmitted into risk at financial institutions is misguided. Bubble plus leverage equals blowup, and though in any given case there’ll be one particular transmission mechanism, if we had blocked some particular path it still probably would have found another way.

Variation Within US Housing Markets

The idea that the United States does not have a “housing market” but rather a series of segmented regional housing markets became a source of false confidence during the growth of the bubble, leading many policymakers to assert that a nationwide price decline was impossible. That, obviously, was wrong. But it’s still true that we have a series of segmented regional housing markets. At the moment, everything is trending downward, but as Ryan Avent observes behavior diverged considerably across markets from 2001-2008 and there’s good reason to believe that divergence will happen again in the near future:

Generally speaking, there are four different kinds of markets out there. There are the bubble monsters, represented in the chart below by Phoenix, which rose dramatically and are now plunging just as (or perhaps even more) dramatically. There are the zoned zone metropolitan areas, represented below by New York, which rose substantially and then held up fairly well until last autumn, at which point they began falling more rapidly. There are the sunbelt juggernauts, represented below by Charlotte, which saw continued price growth until late last year. And there are the Rust Belt dead zones, represented below by Detroit, which began falling at or before the general market peak and haven’t stopped falling since.

The debunking of the old, wrong conventional wisdom that prices always go up has led to a bit of a counter-wisdom that houses always return to the long-run average. I think there’s good reason to think that’s true in the aggregate but the relative desirability of different places to live does change. A lot of neighborhoods in DC are much better places to live than they were 15 years ago, and regulatory issues prevent the supply of housing from expanding in a commensurate way. Conversely, economic opportunities are vanishing in the rust belt faster than the housing supply is.

Homeownership Subsidy Debate at NRO

Over at the Corner, David Freddoso touts a series of tax subsidies the House GOP is proposing to encouraging further investing in the housing sector, including some substantial subsidies aimed explicitly at speculators. To which Jerry Taylor sensibly replies also on the Corner:

I know that there is plenty of political capital to be gained by providing handouts to middle-class homeowners and little political capital in removing the same. But a political party that ostensibly stands for free markets and limited government should not be in the business of underwriting or subsidizing private investments in anything unless we can find some plausible market failure in need of correction (and perhaps not even then).

Hence, the necessary question: Is there any market failure that would result in sub-optimal investment in private housing? Not that I am aware of.

I would, if anything, take this in the other direction. Preferential subsidies for investment in housing lead people to, on average, consume more housing and less stuff-that-isn’t-housing than they otherwise would. In other words, bigger houses instead of fancier clothes. This, in turn, has a substantial negative impact on the economy. Larger houses cost more to heat and cool, and larger houses lead to longer commutes. We shouldn’t stop people from buying big houses if that’s what they want to do, but it’s quite harmful to be specifically encouraging them to invest their resources in this way quite independently from the financial crisis. Reduce the tax-side subsidies to homeownership and we’d have somewhat faster economic growth, somewhat more public revenue, and a somewhat cleaner environment.

US Housing Stock Rushing Toward Liquidation

Jack Healy’s writeup of the latest data on home sales quickly turns into a discussion of whether or not prices are close to “reaching bottom.” Hope springs eternal, but in many parts of the country they still seem significantly above trend. What I would say is that the combination of large declines in sales prices with large increases in sales volumes is good news in the sense that it means that whether or not prices are currently at the bottom, they’re moving aggressively in that direction.

Since most people own homes, people aren’t, in general, enthusiastic about price declines. But the worst possible situation is really one in which nobody will pay what people are asking for houses, but nobody will agree to sell for what people are willing to pay. That kind of scenario might give people who aren’t actively looking to sell some comfort, since they see high list prices. But ultimately it’s a false comfort—a house is only worth what someone is actually willing to pay for it. And in economic terms, I don’t think dragging out the needed adjustment in home values accomplishes anything for anyone. All it really does is hurt people who might be looking to buy, since they would continue to face a frustratingly overvalued market and thus perhaps not be able to find the kind of housing they’re looking to live in.

Meanwhile, mortgage rates are heading down “The nationwide average for a 30-year fixed mortgage is 5.08 percent compared with 5.62 percent a year ago, according to Bankrate, and many lenders are offering loans with interest rates near 4.75 percent.” This, like the fall in home prices, is good news for people who’d been staying out of the bubble market but would still like to own property in which to live. But while the mortgage rates have gotten a lot of discussion in terms of the potential for their impact on house prices and foreclosures, I think the bigger deal is the potential impact on regular old refinancing. Low rates ought to make it possible for a fairly large number of people to refinance and reduce their monthly payment. That, in turn, frees up money that can be used to buy goods and services—leading to more employment, etc.

MBS Values and House Prices

Atrios explains why he thinks the banks’ toxic assets probably aren’t undervalued:

The possibility that the assets in question are not fundamentally undervalued seems like a very serious possibility to me (I’d say a likelihood). Indeed, if one makes the seemingly plausible assumption that property values will continue to decline until they reach something in the neighborhood of pre-bubble trendlines, they’ve got a fair amount left to fall, which is one of several reasons the ‘undervalued’ assumption looks potentially suspect.

I think this is a bit off base. The assets aren’t backed by the houses, they’re backed by the income streams flowing from the mortgages. People don’t automatically default on their loans if their house falls in value. The relationship goes the other way ’round—people in danger of defaulting used to be able to avoid that scenario by selling their house. With prices way down, that doesn’t work any more and defaults are up. But how much defaulting we see over the next two years should have less to do with the price of houses (which is going down) than it does with the unemployment rate. People who don’t have jobs don’t pay their mortgages on time.

The result is a situation in which there’s no unequivocal answer to what the “right” price for mortgage-backed securities is. On our current trajectory, their value is extremely low since the economic outlook is so bleak. But if the administration’s recovery efforts—including this asset business—actually work, then the unemployment rate will be lower, the default rate will be lower, and the assets will turn out to be worth more than people are currently willing to pay for them.

I still think it would be better to do this in a way that didn’t have the “free money for financiers” structure to it. But on the narrow question of whether or not it will “work,” the gamble isn’t that the assets are “really” valuable and people just “think” they’re worthless, the gamble is that it’s the bad state of the economy that’s making them so worthless and that if you solve the bank capitalization problem the asset values will rise.