True, the securities are worth much less than anyone thought they were worth when they were packaged together, but just as Wall Street tends to be irrationally exuberant, so too it tends to get irrationally panicked. These securities still have physical houses underlying them, which even in the worst hit markets should at the very least be worth about 50 cents on the dollar. So long as Paulson doesn’t get too generous, the pain will be shared by taxpayers and the original investors.

Also, the surplus housing inventory numbers are high based on the current rate of home purchases. The current rate of home purchases is very low. The pipeline of new inventory is drying up, the population is growing, and people still need a place to live. Thus the current inventory is deceptive.

What’s more, while California, Florida, Nevada, etc, will continue to suffer, in much of the rest of the country prices and supply never got too far out of bounds, and sales volume has been depressed by the uncertainty and fear. Eventually that’s going to give, and prices will creep up in places like Texas and Tennessee as pent up demand is satisfied. This will offset some of the pain in California, Florida, etc.

Finally, foreign investors can’t flee the U.S. They are as dependent on us as we are on them. And for all the schaden freude foreigners have been enjoying lately, it’s not like their economies aren’t also dysfunctional government/private mongrels. There really is no other safe place to flee to, unless you count gold. In fact, so far all this has increased the value of U.S. government debt.

What’s true though, is that this trade imbalance will continue to fuel more global crises, and eventually it will result in either a slow moving away from the U.S. or a very hard landing for everyone concerned. Just not yet.