Declare victory and leave.

Advice given to Presidents Johnson and Nixon on the Vietnam War by Senator George Aiken, R - VT. 

The current administration reached a financial milestone last week.  Given all that they’ve spent, now might be a good time to declare victory as they pack. 

As Edmund L. Andrews describes in the 26 Nov New York Times, the government has spent “about $1.4 trillion [of $7.8 trillion in direct and indirect financial obligations] … [on] loans, capital infusions to banks and the rescues of firms like Bear Stearns and … American International Group.” 

The table below summarizes these expenditures, and is based on a chart that accompanied Andrews’ article:

The $1.4 trillion total is an interesting figure, particularly if you recall two graphs from my earlier No Pace Like Homes piece.  Below are the graphs and here is a link to refresh yourselves.

  
According to the Census’ Current Population Survey, there are roughly 117 million US households, with a median family income of about $62,500, as suggested by the top “Median Family Income” graph.

As described in No Pace Like Homes, while there had been a relatively stable relationship between home prices and family income for much of the last 30 years, home prices diverged from income beginning in 2001.  This reflected both:

• The embrace of alternative mortgage products and the relaxation of underwriting standards; and a
• Generally favorable interest rate environment.

Both of these “compensating factors” have now vanished. 

As a result, home prices are now “too high”, and  about 18% above that which would be consistent with family incomes.  That is, the red and blue home price lines in the bottom graph are each at about 220 (using a scale of 1988 = 100), while the green family income figure is only at about 187 (using the same scale), and (220 - 187)/187 = 18%.

To put it another way, all else being equal, home prices might be “fine” where they are (and would have no “need” to continue declining) if only family incomes were higher.  How much higher?  Oh, about 18% of $62,500 for each of the 117 million households.  Or numerically:

 
In other words, the amount that the government has already spent to such good effect, $1.4 trillion, exceeds the amount that that the government would have spent had it “simply” given each household  a cash gift of $11,250.  Might this have been more effective than the current TARP, MMIP, TAF, PDCF, TSLF, TOP, ABCP MMMF LF, & CPFF? 

We’ll never know unless we try.

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I used to work with numbers for a living, but now I simply wish that the folks that are still working would work the numbers as I look for a job or at least my next idea.  Till next time.

REFERENCES [Accessed 1 Dec 2008]

 
E. L. Andrews, The New York Times - U.S. Details $800 Billion Loan Plans, 26 Nov 2008.

 
I. Artman, Sterling Slivers - No Pace Like Homes, 2 Nov 2008.

 
Deloitte, Center for Banking Solutions, Credit Crisis Advisory: Stress in the Credit Markets I – Recapitalizing the Banks & Stress in Credit Markets II – Liquidity Arrangements, 21 Nov 2008.

Dictionary.com, Definition – Dissemble: verb: To hide under a false semblance or seeming; to feign (something) not to be what it really is; to put an untrue appearance upon; to disguise; to mask; Webster’s Revised Unabridged Dictionary, © 1996.