Hank Paulson seems to have decided that the right response to a situation in which cheap credit pushed housing prices way too high compared to either rents or incomes, leading to over-investment in housing and then a fall in housing prices which then put lots of homeowners under water and threatened the solvency of the financial system is ... wait for it ... to offer cheap credit to keep housing prices way too high.
....I usually shy away from conspiracy theories, but just ask yourself: if Paulson were an al-Qaeda sleeper agent tasked with destroying the U.S. economy, is there anything, starting with letting Lehman go down, that he would have done differently?
In my opinion, we have been keeping interest rates to unsustainable, artificially low levels for more than a decade. The fact is that a deep recession followed by a period of slow growth is probably the only medicine that can unwind this disaster. But before we can get well, we have to put the needle down.
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