Senator Hillary Clinton:

This is not just a financial crisis; it’s an economic crisis. Therefore, the solutions we pursue cannot simply stabilize the markets. We must also deal with the interconnected economic challenges that set the stage for this crisis — and reverse the failed policies that allowed a potential crisis to become a real one.

Senator Clinton makes tremendous sense in the WSJ op-ed, but like many misses one crucial point. Saving those that are already underwater assumes there is nobody more creditworthy (and more patient) willing to step in once asset prices normalize. Most would rather have struggling homeowners think they are getting a fresh start, when all the process accomplishes is maintaining a semblance of bubble times and the perception of wealth.

It exacerbates illiquidity and decreases economic mobility.

Alan Greenspan is now promoting a direct taxpayer-funded bailout of homeowners. Mr. Greenspan has been trying very hard to shift blame for the mortgage crisis, but this statement takes the cake. Begging for increased Fannie Mae, Freddie Mac, and FHA limits serves much the same purpose. It’s socializing losses.

Be forewarned - a direction is being drawn. A 600 FICO score and a pile of credit card debt is no problem - you are hereby authorized to sign any borrowing agreement you can get your hands on. You won’t need to return that widescreen TV that’s now a part of your HELOC. That leased car you’ve already missed two payments on? It’s yours - just keep it.

It’s not a liquidity issue, or one of solvency. It’s a government problem.

A solution for your debt overindulgence is close at hand - you’re neighbor will soon be bailing you out.

UPDATE: More support for subsidies, at the high end of the market. The high end hasn’t started getting whacked, yet.

UPDATE 2: Yet more on neighbors, including how some are being hurt by the questionable decisions of others.

UPDATE 3: And back to blaming the Fed.

I sold my house a while back, and right now I rent. I have heard every reason why I should be buying again, but still I rent. My friends and colleagues continue to invest in real estate, continue to say how their area is different than the rest of the country, and that appreciation is inevitable. My reasoning - house prices have been acting like bonds - interest rates went into a long decline, and Newton’s Third Law kicked in. And the external force that causes Mr. Gravity’s First Law to take affect are now on our heels.

The following article is about 11 months old, but I believe it is still extremely relevant today. Entitled “There Goes the Neighborhood” by Benjamin Wallace-Wells, it delves into some of the tie-ins between the Federal Reserve, federally insured institutions such as Fannie Mae and Freddie Mac, and how the whole process of mortgage lending (and its underlying lack of accountability), has created a dangerous situation for US homeowners.

Keep in mind, much of what Wallace-Wells says hasn’t quite happened yet, but it is interesting to note that he mentioned problems with Freddie Mac; subsequent to the article, Fannie Mae too has experienced accounting and regulatory inquiry. As these institutions are the engines that make the home lending wheels spin, problems there may still fortell of systemic issues down the road.

Please refrain from comment about how building moratoriums in your particular area have created short supply, how replacement cost for your home has skyrocketed along with lumber prices, or that I should be thinking about my next home as an abode instead of an investment. I have heard every one of those arguments, and by folks from all over the country. They are all thinking the same way you are.

Price takes into account most factors up front, and the unchecked liquidity we have experienced over the last decade will end, sooner rather than later (in fact, it is already beginning). As I believe this liquidity has been the biggest factor in price increases, those prices will have to correct as well, and likely sooner rather than later.