The Asian crisis of the late 1990's eventually spread to America. The Dow cracked and threatened to fall below 7000! Greenspan cut interest rates aggressively and US companies announced share buyback programs which led to a remarkably quick turnaround.
The present crisis has its origins in the housing market. As home prices fell, the loans advanced against them started turning bad. The investors in these mortgage backed securities started pulling out their money, and fresh credit to this sector also dried up.Analysts keep predicting further downsides to home values which is scaring away potential buyers. All this has led to a vicious downward spiral which shows no signs of stopping, although Bernanke is now cutting rates aggressively.
The housing market is not recovering because the second part of the 1990's bailout is missing so far.Just as companies announced share buybacks then, setting in effect a floor price for them, what is needed now is some kind of mechanism to set a floor price on home prices.
President Bush earlier rejected a plan to let mortgage judges alter the terms of mortgages and also refused to allow states to buy surplus homes.Such a policy is clearly shortsighted. We must remember that an average American household has most of his savings invested in his home rather than the stock market.It is essential to prevent further deflation in this sector. If we have gone to such extraordinary lengths in the past to defend the stock markets, then it is time that a similar approach is adopted regarding the housing market. A proposal presently under consideration is to allow home owners in default on their mortgage payments to continue to live in those homes.The title of the property would pass to the lender and they would be required only to pay rent for the property, rents typically being much lower than mortgage installments.These agreements would be for a fixed period, after which the home owner would have an option to repurchase his property at the prevailing market price.It is a time of crisis and requires bold and imaginative decisions.A recovery in home prices will cause a quick turnaround in economic activity.