Joseph Nocera
The New York Times
October 20, 2008

Now that the government has “saved” Wall Street — at least for the moment — hasn’t the time finally come to save Main Street too?

The Treasury Department just pumped $125 billion into the country’s largest financial institutions, and it promises to use another $125 billion — more, if necessary — to recapitalize regional and community banks. They are vital steps. This week, at long last, the credit markets thawed, at least a little, and the global recapitalization of the banking system is the reason.

  • A d v e r t i s e m e n t

But the job isn’t done yet. The government now needs to tackle what R. Glenn Hubbard, the former chairman of the Council of Economic Advisers under President Bush, calls “the elephant in the room”: the continuing decline of housing prices. That decline means more and more homeowners are saddled with “impaired mortgages” (to use the current lingo), meaning their homes are worth less than what they owe on them. They didn’t necessarily do anything wrong; they just bought a house near the peak of an unsustainable bubble. Now they have little economic incentive to keep making mortgage payments.

Of course, millions of additional homeowners did make a big mistake: they took advantage of “liar loans” and other too-good-to-be-true deals to buy homes they couldn’t afford. Many are still in those homes, hanging on for dear life. Many others have already faced foreclosure proceedings.

I’ve seen estimates suggesting as many as one out of every six homeowners has a troubled mortgage. This is an enormous social problem. It is also a continuing economic problem. In the year since the crisis began, the world’s financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion. In other words, we ain’t seen nothin’ yet.

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