The housing crash currently in its infancy will soon grow up into an economy killing monster that the Federal Reserve has no weapon strong enough to defeat. A housing crash is unlike a stock market crash in that there is no easy way out.

Let’s take a walk back in time to the tech stock crash just 8 years ago and compare it to a housing crash.

Is A Housing Crash Worse Than a Stock Market Crash?

The tech stock bubble crashed in the spring of 2000, and the Fed then went on a rate cutting spree ending in June of 2004. The Fed dropped rates something like 15 times to stave off recession. The tech stock bubble and crash could be managed said the Fed with an increase in liquidity to the economy in the form of cheaper money. The banking industry helped him out by offer anyone with a pulse a mortgage flooding the economy with even more money.

And it worked…or did it?

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Beginning in 2004 the Fed reversed it’s position and started raising interest rates leaving in it’s wake an unprecedented housing bubble. Home prices around the country rose further and faster than in history between 2000 and 2004. In some area, 100% increases in prices were not unheard of. For example, by a house in San Fransisco in 2000 for $300,000 by 2004 it could sell at $600,000 without a problem.

But by any measure, that is the quintessential definition of “bubble”. For every bubble there is a corresponding “crash”. And a crash in the housing market dwarfs a crash in the stock market in both scope and size.

Fast forward to today, January of 2008, and we find the housing crash in full swing in most of the country…and it’s still early in the cycle.

Foreclosures are up, existing and new home sales are down, and house inventories are exploding…forecasting that this is only the beginning in what could be the worst housing market since the Great Depression.

What Can Bernanke Really Do To Stem the Housing Crash?

Unlike his predecessor, Mr. Greenspan, who only had a stock market crash to contend with which is less in scope and does respond to monetary manipulations, Mr. Bernanke has NO effective tool to deal with a housing crash.

Even though we must give Bernanke kudos for inventiveness when he decided to turn the central bank into a hedge fund to support the JP Morgan takeover of Bear Stearns this week (the first time in history the Fed gave access to an “investment bank” rather than a “depositor bank”), it won’t stem the underlying problem of plummeting home prices.

The credit crunch combined with a housing crash is the “perfect storm” and Bernanke is no George Clooney. This combination curtails any borrowing by consumers and since they pulled out of the stock crash by buying big screen TVs with home equity, we are dead in the water.

With consumer sitting on the sidelines, a recession …or dare I say depression is almost a guarantee.

The Housing Crash Domino Effect

The domino effect comes into play…housing bubble leads to housing crash, housing crash leads to credit crunch, credit crunch perpetuates housing crash and leads to lower consumption, lower consumption leads to layoffs, layoffs leads to even lesser consumption and perpetuates housing crash and tightening credit standards equals more credit crunch.

Once the dominoes start to fall…there is nothing anyone can do to stop it…

Not Bush’s stimulus package and not the Federal Reserve cutting rates since there is no market left to inflate.

Only time will unwind this mess the banks and the Fed put us in. Remember, it took Japan over 16 years to come out of their housing crash when Japan’s rates went to zero and yet know one could or would borrow any money.

So the Federal Reserve lowering rates to stop the housing crash is like trying to put out a fire with an eyedropper. The Fed taking on billions in subprime mortgage risk in the Bear Stearns takeout won’t help either…and all of us, including Mr. Bernanke, will soon see that first hand.

Prepare yourself…

Good Luck!

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Author: The Mortgage Insider