The bursting of the housing bubble in 2006 exposed the outrageous risk taking of "Too Big To Fail" financial institutions and the failure of regulators to prevent both the creation of Too Big To Fail investment banks and their hugely leveraged risk taking. Plummeting housing prices triggered a chain of events that crashed the economy. Stopping the still continuing decline in housing prices is essential to any sustainable economic recovery.
Yesterday in the New York Times, Martin Feldstein who was President Reagan's Chair of the Council of Economic Advisers and is a Harvard economist authored a column full of scary housing facts and offered a plan to solve them.
Housing prices have fallen 40% since 2006. They fell another 8% from June 2010 to June 2011. About 15 million homeowners owe more than the home is worth. Among those who do owe more than their home is worth, 50% of them have a home where the mortgage is 30% or more than the value of the home.
All those facts and especially the continuing decline in home prices are terrible economic news. Feldstein, however, lays out a plan to solve them. He calls for the government to reduce mortgage principal if a mortgage is 110% of the home's value, with the bank and government splitting the loss, and with the homeowner getting a new but full recourse mortgage--a mortgage where the home plus all assets of the homeowners are collateral.
This economy will not restart without both auto production and housing returning to health. The auto industry is healing with annual sales of 13 million cars, up from the depression rate of 9 million cars, but below the pre-crash rate of 16 million cars.
But until housing prices stop falling and start increasing, our economy will remain in danger of deflation and recession. Consumers simply won't buy enough goods and services for healthy economic growth when their homes are losing value.
Martin Feldstein's proposal to stop the collapse of housing prices should be read by Democrats, Independents and Republicans. Is anyone listening to Reagan's top economist's cure for the housing market and hence our economy?