It's going to get worse

Paulson was asking lawmakers to take unprecedented action, in the face of overwhelming public anger, in the midst of the most convoluted and sprawling financial crisis in modern history. They wanted to spend US$2,300 for every man, woman and child in America to buy assets that nobody else in the world wants, at prices nobody else will pay. And, just like that, a huge swath of bad debt would be cut out of the financial system like a malignant tumour. Banks would be freed to go back to the business of lending, buyers would return to the housing market, consumers would begin spending again and, after a few rocky months, America's economic miracle would be back on the tracks. True, you'd be saddling the taxpayers with potentially huge losses, but there was a decent chance that once confidence returned, many of those toxic mortgages might actually recover and most, if not all, of the government's US$700 billion would be recovered. Uncle Sam tried a similar trick with bad loans back in the Great Depression and wound up turning a small profit.

 

As we all know by now, the spectacular U.S. housing boom, which saw prices rise by 85 per cent in major markets in the decade leading up to 2006, has reversed itself with ferocious consequences. Already, housing prices in the U.S. have fallen by 24 per cent from the peak reached two years ago, and Robert Shiller, a professor of economics at Yale University, is one of many leading observers warning that the declines aren't nearly done yet. He notes that during the Great Depression, real estate values plunged by 30 per cent. This time, he says, the decline could be worse because prices rose so much more sharply in the past decade than they did in the 1920s. "Even if prices stop falling and just stay at this level, we'd have somewhere around 10 million people whose home's value is less than their debt," Shiller said in an interview with CNBC. Indeed, there are few signs that the U.S. real estate market is near a recovery. Last month, foreclosures hit an all-time high of almost 304,000 and new home sales slid to their lowest point in 17 years.