MIT Panel

MIT had a panel yesterday of experts on the financial crisis, as has most universities across the country. Ours did, too. One of the comments made during ours yesterday has stuck with me. A student asked one of the panelists what he thought of McCain's plan to spend $300 billion to buy up excess inventory of housing stock in order to deal with the falling home prices. The panelist in question thought that that got closer to the right solution, because it addresses the root cause of the problem and not simply the middle-men, which is where the Paulson plan and its derivatives are focused. William Wheaton, professor of economics and real estate at MIT, seems to agree.

William Wheaton, professor of economics and urban studies and director of research for the Center for Real Estate, stressed that part of the reason for the real estate bubble -- and its resulting collapse -- had to do with an excess of capital globally. Much of that ended up going into American real estate, as a result of these financial instruments that bundled mortgages in a way that was perceived as greatly reducing the risks involved. That influx added to the pressure for lenders to offer more loans "to people who were incredibly more risky," he said.

While the averaging out created by these securities helped to smooth out the risks of individual mortgages, Wheaton said, that process "really offers no advantage against systematic risk," such as the overall downturn in housing prices -- an event he compared to a "100-year flood" in economic terms. But the storm was created in large part, he said, by an excessive boom of housing construction while the prices were rising. "I actually think it was oversupply" of housing that caused much of the problem, Wheaton said.

To fix the problem, he said, in economic terms it is more important to stabilize house prices than it is to keep people in their homes. While that may seem cold, he said, much of the boom was fueled by what he called "marginal" buyers -- those buying second homes or investment properties on speculation, who had no strong attachment to the properties. The current slump in home construction, he said, may actually be good for restoring the economy.