When prices decline, the financial system will again be in crisis. Millions of mortgages will be under water again. Homeowners will either walk away from their mortgages, or be foreclosed. The losses will ripple throughout the financial system and markets, just as they did 10 years ago. And taxpayers will be forced, yet again, to pay for the bailouts of Fannie and Freddie, because this time, we own them.
Ultimately, another housing collapse would trigger the Fed to reverse policy, but that’s still many months away. The Fed will continue to tighten the screws until well after the new crisis becomes apparent. Powell affirmed as much at his press conference when he said that the Fed won’t lower interest rates until there’s a sustained financial decline. And we should well remember just how long it took Bernanke to even acknowledge there was a problem.
