Gone Baby Gone

By PAUL KRUGMAN
New York Times

It pains me to say this, but this time Alan Greenspan is right about housing.

Mr. Greenspan was wrong in 2004, when he sang the praises of adjustable-rate mortgages. He was wrong in 2005, when he dismissed the idea that there was a national housing bubble, suggesting that at most there was some “froth” in the market. He was wrong last fall, when he suggested that the worst of the housing slump was behind us. (Housing starts have fallen 30 percent since then.)

But his latest pronouncement — that the market rescue plan being pushed by Henry Paulson, the Treasury secretary, is likely to make things worse rather than better — looks all too accurate.

To understand why, we need to talk about the nature of the mess.

First of all, as I could have told you — actually, I did — there was indeed a huge national housing bubble.

What even those of us who realized that there was a bubble didn’t appreciate, however, was how much of a threat the bursting of that bubble would pose to financial markets.

Today, when a bank makes a home loan, it doesn’t hold on to it. Instead, it quickly sells the mortgage off to financial engineers, who chop up, repackage and resell home loans pretty much the way supermarkets chop up, repackage and resell meat.

(Continued here.)