Abhi asks how “Does the credit crisis affect ‘us’” and what Desi’s could do so I thought I’d chime in. Personally, although I’m a pretty strident free trader, the more I learn, the more I believe some sort of bailout is ultimately necessary (and so I’m probably disappointed by the House’s failure to pass legislation - don’t know enough of the deets to say for sure).

The Solution to the Credit Crunch? More Desis.

How do I resolve the apparent contradiction? Well, the govt was a large part of why we’re in this mess and it must now reap what it sows. Uncle Sam both directly and indirectly helped push mortgages into new hands that couldn’t afford them (and thus piled on to a Wall Street orgy). Had this been an entirely Wall Street phenomena, perhaps the “housing bubble” would have looked like the prior “dotcom bubble” - painful, but not exactly disastrous. It truly takes the government, however, to ratchet things up to the next level.

Of course, it’s awful on almost all counts that taxpayers get stuck holding the bill. But as I often say here, most of life’s choices aren’t between good and bad (and a bailout is clearly bad) but rather, between bad and worse (an economy-wide credit crunch). It’s cheap & easy moral pontificating to iterate the umpteenth reason why the situation is Bad (or why some sort of Wall Street comeuppance is Good). What real adults have to do is accept the bad to avoid the worse.

This interview from Greenspan, circa August 2008 is quite plain & direct about the necessary outcome -

The collapse in home prices, of course, is a major threat to the stability of Fannie and Freddie. At the Fed, Mr. Greenspan warned for years that the two mortgage giants’ business model threatened the nation’s financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt “inevitable,” he said. “There’s no credible argument for bailing out Bear Stearns and not the GSEs.”

If there’s a silver lining here, perhaps it’s that taxpayers & voters will have been taught a bitter lesson about what danger lurks the next time a politician tries to promise some new class of positive, economic rights…

There’s no such thing as a free lunch and when a politician promises economic benefits to one group what it usually means is that costs will be displaced either in time or to a different, less politically favored group. Most often, that “group” is the public at large who have better things to do with their time than scrutinize the cost of individual earmarks. We’re now seeing the price of govt attemps to create a “right to home ownership”; similar days of reckoning await with “right to retirement” and “right to healthcare”. (Imagine the massive unused daytime TV commercial airtime and unemployment in the Scooter industry when/if the Medicare gravy train grinds down )

So what is perhaps uniquely Desi about the whole thing? Well, in that same interview, Greenspan offers one, relatively straightforward (albeit partial) remedy. Simply put, the current crisis is caused by a price collapse as too many homes chase too few folks who reliably make their mortgage payments. So, why not *import* folks who are more predisposed than average to being both credit worthy and buying new homes?

“The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants,” he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. “Perhaps 150,000 of those are loosely classified as skilled,” he said. “A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale — and hence help stabilize prices.”

And, of course, any wholesale increase in “skilled immigration” to the US has a pretty disproportionately positive impact on Desi’s. So Desi’s - do your part, go forth, multiply, and continue to maintain your credit scores assiduously.

UPDATE: Another Desi angle -

Corporate America has just lost a chunk of its value the size of the Indian economy.