Recycling our fiscal errors

[BR_Parkway]

http://www.chicagotribune.com/news/columnists/chi-oped0122chapmanjan22,0,7246059.column

But it's worth remembering where our problems began: with an oversupply of housing. Channeling more funds into the residential sector will encourage more home building, which will worsen the glut, which will push prices down even further and generate more foreclosures, which will deepen the recession.

The sad reality is that the housing sector has gotten too big and will have to shrink. A lot of people who prospered from catering to the inflated demand for housing, from carpenters to real estate agents, will have to find new ways to make a living. That's what the end of a bubble means.

But plenty of people in Washington are nostalgic for the good old days. It's not just in housing. The Treasury and the Federal Reserve had to inject hundreds of billions of dollars to shore up banks battered by loans that went bad—toxic debt, it was called. So we want banks to be more prudent, right? Wrong. Congress is complaining that banks that received federal aid are being overly stingy.

Well, yes. If a lot of your loans go bad, it's a sign that you need to exercise more care. That's especially true during a recession, which can wipe out companies that once were profitable. Any bankers who want to keep lending at the rate they did before are asking to become insolvent, and more insolvent banks would drag down the economy.

Not to say that everyone who wants a home has one (or can even afford one) but one point that folks don't seem to be talking about is the major oversupply of houses already out there - too many were purchased the first time by flippers - never intending to occupy them, simply hold them and resell at a profit. The 80's & 90's recessions were helped to end by building more housing, but this time this isn't a realistic option.