Even though the panel I was on last night had nothing to do with housing, the guy up on stage playing the cranky rightwinger role couldn’t resist making an offhand reference to the idea that our problems are grounded in the fact that people bought houses they couldn’t afford. I think this misunderstands the issue in an interesting way that’s worth spelling out in slightly tedious detail.

Start out with the idea that a developer builds a house out of cash that he has on hand. Now you have an asset — a house. Then he sells the house to a person, who buys it with a mortgage. Now you have two assets. There’s a house, owned by a family, and a loan owned by a bank. Then the loan goes through the securitization rigamarole but the loan still exists out there somewhere as a financial asset. And then there’s the house. The homeowner has possession of the house, and he also has an expense in the form of his mortgage payments.

Now let’s say the homeowner takes a negative shock to his income. He had a freelance deal with a magazine that goes bust. With his new lower income, the homeowner needs to reduce his expenses. He can do that two ways. One would be to severely crimp non-housing consumption because he “bought a house he can’t afford.” The other would be to sell the house and move into a cheaper one. Either way, it’s sad for him, but it’s just sad in the general sense that his income has gone down. The economy as a whole trundles along fine. It’s always the case that individual households’ incomes are fluctuating and that consumption levels are therefore fluctuating as well. If you’re eating at restaurants you can’t afford, the solution is to start eating at cheaper places. If you’re renting an apartment you can’t afford, the solution is to move to a cheaper apartment. And if you own a home you can’t afford, the solution is to sell the home and move to a cheaper one. The problem facing the typical troubled household in America today, is that this “sell and downsize” process doesn’t work. That’s because the price of houses has fallen, but the price of already-extant mortgages hasn’t fallen. In other words, if you paid $350,000 for a house that’s now worth only $250,000 then selling the house doesn’t get you out of the need to pay your mortgage.

This is the actual problem. In time one, the value of the assets owned (houses) was proportional to the value of outstanding debt claims (mortgage payments). But now in time two, the value of the assets owned is much smaller than the value of outstanding debt claims. As a result, households can’t scale back their consumption of housing to an affordable level. They have instead two choices. One is that they can strangle non-housing consumption in order to pay off the old debts, and the other is that they can default on their housing debts. Insofar as they do the former, the “real” economy of producing goods and services suffers from reduced consumption. If they default, then what happens is that the value of the other asset created at the time the house was sold — the mortgage — declines, and the financial economy suffers. Banks end up undercapitalized. Consequently, our policymakers are currently in the position of trying to allocate losses between the banking system and non-housing household consumption with an emphasis (it seems to me) on trying to mitigate banking system losses.

There are a few different ways you can categorize this problem. One, à la Dean Baker, is as a wealth effect issue where the vanishing of notional housing wealth is strangling nominal spending. Another, à la Scott Sumner, is an income effect issue where the collapse of nominal spending is destroying the housing wealth. But either way, past overconsumption of housing is not the problem. You could imagine a country where industrial output is collapsing because of a lack of adequate production inputs because all the raw materials have been turned into houses, but that’s not the country we’re living in.

Something that I think is missing from discussion of the Anwar al-Awlaki case is the question of why he was still a U.S. citizen up to the day he died. You might ask yourself, what if during the height of the Vietnam War an American had defected to the North Vietnamese and served in their military. Couldn’t our soldiers shoot him? Wouldn’t that be the case even if he was in a support capacity rather than a battlefield role? Well at least part of the answer is that you’d lose U.S. citizenship if you defected:

Section 349 of the Immigration and Nationality Act (8 U.S.C. 1481), as amended, states that U.S. citizens are subject to loss of citizenship if they perform certain specified acts voluntarily and with the intention to relinquish U.S. citizenship. Briefly stated, these acts include:

1. Obtaining naturalization in a foreign state (Sec. 349 (a) (1) INA);
2. Taking an oath, affirmation or other formal declaration to a foreign state or its political subdivisions (Sec. 349 (a) (2) INA);
3. Entering or serving in the armed forces of a foreign state engaged in hostilities against the U.S. or serving as a commissioned or non-commissioned officer in the armed forces of a foreign state (Sec. 349 (a) (3) INA);
4. Accepting employment with a foreign government if (a) one has the nationality of that foreign state or (b) an oath or declaration of allegiance is required in accepting the position (Sec. 349 (a) (4) INA);
5. Formally renouncing U.S. citizenship before a U.S. diplomatic or consular officer outside the United States (sec. 349 (a) (5) INA);
6. Formally renouncing U.S. citizenship within the U.S. (but only under strict, narrow statutory conditions) (Sec. 349 (a) (6) INA);
7. Conviction for an act of treason (Sec. 349 (a) (7) INA).

What Awlaki’s done is basically in the spirit of items 1-4 on the list. But it doesn’t count, because al Qaeda’s not a foreign government. The correct way out of this seems to me to amend the relevant section of the Immigration and Nationality Act such that swearing allegiance to al Qaeda can count as an expatriating act in the same way that defecting to North Korea would. Then you would need a quasi-judicial process through which an evidentiary determination could be made that someone has, in fact, expatriated himself. It’s less fun than ad hoc determinations by the DOD and the White House staff, but it would sit a heck of a lot easier with me.

Lydia DePillis reports from a forum on gentrification organized by Marion Barry, noting that “people spend their time fighting about the causes of inequality and who to blame for it, but mostly agree that the answer is more and better education for all ages.”

I love education, but from where I sit, more and better education has to primarily be an issue for young people. There’s a role for adult education, of course, but if you’re talking about someone who dropped out of high school 20 years ago, I think you really ought to be contemplating what it is that can help someone like that get ahead economically that doesn’t assume you’re going to be able to undue inadequate education decades in the past. This is where in communities like working class DC that has a high structural level of unemployment (i.e., even before the recession the unemployment rate for folks who hadn’t gone to college was very high) I think it would be helpful to offer one or two cheers for “bad jobs.” Good jobs are great, of course, but in a metropolitan context, the problem is that DC can create all the high-paying high-skill jobs it likes and that doesn’t change the fact that lots of people living in the city aren’t qualified for those jobs. What they need are jobs that are a superior alternative to unemployment — low-wage, low-skill food sector and retail jobs that they’re actually qualified for.

This whole sector of the economy doesn’t get a ton of love from politicians because, obviously, we’d like to aspire to something better. And the aspiration is great. But coping with acute present-day problems is also important. When you make it difficult to open fast food joints you’re creating a problem for the kind of people whose past life has left them qualified primarily for those kind of positions.