I'm at a panel with Austan Goolsbee and Jack Kemp on the American economy. The first question is about the housing crisis. Kemp blames it on excess liquidity, and says that we shouldn't be bailing out lenders; we should have directed the rebate towards homeowners.

Goolsbee talks about the decline of lending standards, and asks why we didn't pass legislation against it. He says that lenders were lobbying hard against the right sort of laws. But there's a deeper question to that: why were they lobbying against something that turned out to be against their best interests? You have to look at what sort of psychological conditions create bubbles; they operate on both sides.

He also brings up two things a lot of economists are worried about: first, a "second wave" of foreclosures that's expected to come in 2009 as people exhaust their savings; and second, the fact that people are turning to credit cards now that they can't tap their houses for equity.

My sense from talking to people at places like the FDIC is that these things are not quite as worriesome as some analysts would have it. The second wave is unlikely to be as sizeable as the first, and the securities have already been written down so far that it's hard to see this having a big economic impact--which is not to say that it won't be a tragedy for those who are foreclosed on.

I confess I was worried about the credit card industry giving us a second liquidity crisis, since most of their debt is securitized as well. But the bankers I talked to pointed out that the duration mismatch on credit card debt is much lower than that on mortgage debt. A credit card, aka revolving debt, is essentially taking out a new loan every month (which is why they can change your interest rate and terms at will). As soon as defaults go up, the credit card companies shut down the lines of credit--there's no long lag where the economy can accumulate a massive supply of debt with unclear default rates. Moreover, the credit card lenders, at least according to my sources, have much better tools for managing these risks, precisely because the shorter durations give them much better information on their borrowers.

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