What is Larry Summers Smoking?

Larry Summers is right: we need to fix the housing market (NYSE:IYR) if we intend to see the US economy come storming back. However, in his recent bully pulpit post at Reuters, Summers slips in a very curious and, frankly, insane statistic to use as a benchmark for mortgage credit standards.

Here’s Summers’s premise:

First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and rigorous in America today. This reduces demand for houses, lowers prices and increases foreclosures, leading to further tightening of credit standards and a vicious growth-destroying cycle.  Publicly available statistics suggest that the characteristics of the average applicant in 2004 would make an applicant among the most risky today.  Of course the pattern should be opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations.

Really? C’mon man! After watching individuals making $40,000 a year accumulate multiple houses and properties on a basic salary, Summers wants to use 2004 lending standards as a benchmark for normal? That is incredibly dumb. Plain stupid.

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Here’s a better idea: let’s start creating a sustainable economic reality in which people only get mortgages IF they can actually afford them. While this might not get us through the current real estate slump at godspeed, it will create a foundation for a much healthier long term housing market.

Although I am not a former U.S. Treasury Secretary, I have enough experience to know the great credit and subsidy schemes run by the government — and supported by financiers — have merely created a harsh bubble-collapse economy that sucks to live in. The housing market has been declining for over 5 years, so let’s just suck it up and get through the rest of the bad part so we don’t have to do this again in 5-10 more years.

If leaders like Larry Summers want to help after they simply dumped liquidity into a crashing global economy to stave off a depression, it’s time to bring U.S. consumers back to reality from their multi-decade credit induced binge. If all the solutions to our economic issues revolve around selling more cheap debt to irresponsible consumers, then the next Great Crash is always going to be right around the corner. Then, we’re the ones who get smoked.

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