I have a nagging feeling that its gonna fail, long term. Warn you, I am no expert to predict. I can’t even predict and manage my own life, let alone a major financial crisis like this. But as a home owner and a parent, I am scared too. I thought I will write a bit on it.
The key point of bailout plan is (From AP )
Authorize $700 billion for the government to purchase troubled assets and buy equity in distressed financial firms.
I understand the rationale, its to stay afloat the liquidity of the mortgage backed securities.
Thats exactly what is bothering me. This bailout plan is intended to stabilize the housing market. There by yielding a steady profit to the mortgage backed securities. If the securities need to yield profit, housing prices has to go up. And sure it will go up again.
Did you see a pattern. ?
We are getting into the same vicious cycle. Two years down the road there will be a bailout plan for this bailout plan. Thats because the economy is too much dependent on the housing market.
I don’t know exactly how; IMHO following are needed to have a stable economy.
- Should inculcate an entrepreneurship culture to create more Manufacturing jobs; small towns should sprang up in the suburbs creating a healthy new set of middle class.
- Research and innovation should expand and should be able to sell technology to under developed nations. If needed should bring more foreign workers on H1B.
- New universities/courses and inviting foreign students. Should even start universities outside of US, like in europe or asia.
- Create programs to spread people to the smaller towns, government can even fund/ provide subsidy to people who wants to start a farm
While, I was writing this I just realized how similar the situation is back home in India too. The same solution will work for all countries whose economy depends massively on a housing market.
Bottom line, an economy that just depends too much on the housing market will not sustain.